Understanding the GameStop Short Squeeze (INFOGRAPHIC)

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Brian Wallace, Founder & President, NowSourcing

If you have been paying attention to the news recently you might have heard of “meme stocks.” These are traditionally stocks from businesses that have historically been on the brink of bankruptcy or irrelevance. These are buzz stocks like Blockbuster, AMC, and GameStop or other “childhood” favorites that are no longer as prevalent in the world today. 

While many people may recognize these types of stocks from the recent headlines it may be harder to decipher why these have been trending. The stock market has been a platform that seems to be designed for the elite to make even more millions from their millions. Many people believe that they don’t have the finances or knowledge to be competitive in the stock market, so they just ignore it and allow it to operate as they live their separate lives. 

This is exactly what investors and hedge fund managers count on, and so it has allowed them to create a practice called a short squeeze. Shorting is a process that occurs between two parties. Party one is the owner of stocks and Party Two is the manager of Party One’s portfolio. Party two sees that Party one’s stocks are valued at say 30 dollars, so Party Two asks Party One to hold their stocks for a little bit. Except Party Two has no intention of holding the stocks and sells them thinking that they can buy them back later at 10 dollars therefore making a profit of 20 dollars. 

This method has worked for almost decades, but now we introduce a new group: the DIY stock investors. This is what happened with GameStop. The DIY’ers found out about Party Two’s nefarious actions and decided to put a stop to it. They started to buy up all available shares of GameStop therefore driving the price of the stock up. Now, Party Two has told party One that they have 5 shares of GameStop when they really don’t and to buy back those shares now costs 400 dollars instead of 30. 

Because of the media coverage on this situation the GameStop Stock craze has highlighted some inherent problems with our stock market. Going forward, this historic event should prompt change in the way we handle and let other people handle our investing portfolio. We need to be more cautious of our surroundings especially in the financial sphere going forward so we can avoid these situations. 

 

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About the Author: Brian Wallace is the Founder and President of NowSourcing, an industry leading infographic design agency in Louisville, KY and Cincinnati, OH which works with companies ranging from startups to Fortune 500s. Brian runs #LinkedInLocal events, hosts the Next Action Podcast, and has been named a Google Small Business Adviser for 2016-present. Follow Brian Wallace on LinkedIn as well as Twitter.