| Bofferbrauer2 said: It's a short squeeze. It works basically like this: An investor shorts a stock, meaning he bets the value of the shares of a company will drop. To do so, he sells shares, but only buys them at a later date and pockets the difference if the price went down. However, what can happen is that the price went up instead of down. In that case, the investor might be forced to buy the stocks at a higher price, making some losses in turn. Now imagine a company like Gamestop, which had been sliding in stock value for 6 years straight. As a result, there are tons of investors here who short Gamestop stocks. The problem is that when somebody buys Gamestop stock, their price goes up. In other words, every investor who shorted the stock and now wanted to get out of that position is driving the price higher for all the other investors in that position. As a result, they are now trying all together to get out of their shorting position, resulting in the exploding price increase of the shares. Now you might wonder why they couldn't just wait until the price goes down again. Well, the problem with a short position is that they are generally timed, meaning you need to give the share you're selling if you're shorting within a given timeframe. This is why the investors can't just sit out the storm and wait until it goes down again and try to buy before it gets even more expensive. And yes, shorting is nothing else but gambling at an absurd level. Investing in the stock market is gambling either way, but shorting is pretty much the worst offender in that domain. |
Thank you @Bofferbrauer2 as always for your valuable insight. It took me a couple of reads but I think I understand the basics.
Basically in stock market, if more people want to buy than people that want to sell, then the stock goes up. But if more people want to sell than people that want to buy, the stock goes down. (is this correct?)
Therefore in this scenario, a lot of people shorted the stock, meaning they perhaps started at $20 in October, wishing the stock would go down after the holidays. But with the stock rising daily and being at $85, they probably got scared because they were already losing $65 for each share they shorted, so they are forced to buy, meaning everyone that shorted is now trying to buy the stock. Leading to the stock quickly rising because there are a lot of buyers and a few sellers.
Now, obviously the value of the stock will rise so much that people that now own the stock know it is over valued and will try to sell the stock again, meaning the stock should just drop back down quickly. So if people who shorted the stock just wait, wouldn't they be able to buy later at a more reasonable price?
I think in the end, a lot of inexperienced people are going to get burned hard from trying to play with the stock market. Imagine someone who shorted 1,000 shares at $20 and then had to buy at $150. That person basically just payed $130,000 just to get rid of the stock.
It is horrible to see something like this. here is a screenshot of what it looks like right now:
Thank you @theRepublic for sharing that info, I had not seen the article, and it just makes things worse. How one person can really affect a market is amazing.
