If you follow stock trading at all, you might have noticed something very weird happening with the stock of video game seller GameStop. The company has been considered to be circling the drain for some time now, due to the shifting landscape of video game distribution. Many gamers have switched to buying their games digitally, spurning brick-and-mortar stores in favor of online sales.
This has led to many investors shorting GameStop. If you’re not familiar with shorting, it’s a process where investors essentially bet that a company’s stock is going to lose value. Should the company lose value or, preferably for the shorter, go out of business, the person placing the short will be paid handsomely.
Here’s a short version: if you think a company’s stock is about to go down, you borrow it, sell it for what it’s going for to someone else, and when it tanks, buy it back, pocketing the difference, before giving it back to the person you borrowed it from.
Shorting GameStop Backfires Bizarrely
Here’s where things get tricky. Shorting companies that are on their way out of business has long been risky, but it’s typically a calculated gamble. One of the driving forces behind GameStop’s recent rash of naysayers was the Bounty Hunter of Wall Street himself, Andrew Left. Left is infamous for shorting companies and then publishing material that shows the company’s dire straits.
Essentially, Left calls his shot and then makes sure the market is aware that he’s right. It’s a gamble, sure, but he’s usually got the research and data to back up what he’s saying. However, Left encountered something weird with his recent shorts on GameStop: widespread resistance from amateur investors.
Reddit Gets Involved
An unhinged and irreverent subreddit called “Wall Street Bets” decided to stop Left’s strategy from working. The subreddit’s members agreed to invest heavily in GameStop, buying up tons of stock at initially low prices. This caused a number of people who placed shorts to suddenly be called onto cover their short, giving their borrowed stock back, and taking a bath on it in the process.
Since all the investors who placed shorts had to buy the stocks back to give them to the people they borrowed from, this caused a feedback loop that saw GameStop’s stock shoot up dramatically in price. Essentially, too many people believed that the company was doomed to fail and got overzealous about shorting it, and so a bunch of finance enthusiasts online decided to make it blow up in their faces. And, somehow, it worked.
In response, Left has announced he’s no longer commenting on the stock. “We are investors who put safety and family first, and when we believe this has been compromised, it is our duty to walk away from a stock,” Left wrote in a Twitter post.