Hedge Fund Managers & Casual Traders Collide in Historic Short Squeeze
- Author: Jacob Greene
- Posted: 2024-07-12
Stock Market speculators are still reeling from the massive upset that propelled GameStop (GME) stock through the proverbial roof in recent days. Experts spin as other stocks joined the videogame retailer on its rocket ride upward throughout the week.
As the dust begins to settle, a new landscape is emerging that promises to change the way stocks are evaluated, rated and handled in the future.
What Happened?
For years, hedge fund managers have earned enormous returns for their investors by short selling stock in companies they feel are failing. Short selling involves borrowing and immediately selling a massive number of stock shares from lenders to trigger a drop in that stock's value. The borrower can then repurchase those shares at a lower price, return them to the lenders and pocket the difference as profit.
It is a tactic that has been employed successfully for decades and has helped the rich get richer.
Recently, hedge fund managers targeted the video game retailer GameStop. However, this time, home traders caught on and bought that shorted stock up quickly to create what is known as a short squeeze.
The Short Squeeze
When a mass of investors buys up shorted stock simultaneously, it is called a short squeeze. The 'squeeze' pushes prices higher.
As short investors see their profits slipping away, they begin speeding up their efforts to cover - buying the shorted stock back at a lower price to ensure a profit or mitigate loss. This race to buy propels the value of that stock even higher.
This effect is what happened with GameStop.
It did not stop there, though. Since the retailer's rapid ascension, other short stocks have shot up as well.
Stock Trading Changed Forever
Now that the genie is out of the bottle, there is no stuffing it back inside. Amateur home traders and others are on the watch for the next shorted stock to squeeze. This heightened vigilance led to other stocks following GameStop in the stratosphere.
Throughout the week, several stocks have seen gains thanks to the awakening triggered by the GameStop squeeze. These include AMC, BlackBerry, retailer Express and others.
AMC Entertainment Holdings (AMC)
AMC is one of the world's largest cinema operators. Still, the massive shutdowns caused by the coronavirus pandemic left the company struggling.
Despite continued nationwide closings and lackluster offerings, AMC stock shot up 224% in the early trading hours of Wednesday, January 29. It went from the verge of bankruptcy to the biggest gainer and most actively traded stock on major U.S. exchanges.
BlackBerry Ltd. (BB)
The Canadian cybersecurity software company has also benefited from the short squeeze trend. BlackBerry stock had struggled to hold on since the early 2000s when their cellphone was still relevant.
However, getting caught in the squeeze play now caused the company's stock to rally 194% in nine days.
Some have tried to attribute the rise to a recent settlement between BlackBerry and Facebook as well as patent sales to Chinese tech giant Huawei. However, analysts point out that while this news was mostly positive, the actualized increase in value far exceeded what these announcements would trigger.
Koss Corp. (KOSS)
Headphone manufacturer Koss Corp. also shot up on Wednesday, January 27. The Milwaukee-based company was the day's second-largest gainer behind AMC with a 198% increase in stock value.
With no new news coming from the company itself since its quarterly report in October of 2020, there is no legitimate reason for the increased interest. The shorting of Koss stock triggered its growth as surely as it did with GameStop.
Express Inc. (EXPR)
Struggling retailer Express also benefited from being caught up in the short squeeze feeding frenzy. Stock in the company rose 190% on Wednesday, setting it on course for its highest close since late 2018.
Despite a jump in volume early in 2020 with the announcement of lucrative partnerships, Express stock dropped soon after. This slight boost is unlikely to have had any effect on the current climb of Express stock.
The cause rests firmly in the short squeeze and an investor rush prompted by social media personalities on Reddit.
The Take-Away
While amateur investors have hit it big by squeezing short sales for every penny, this type of speculative trading is considered extremely high risk. While this current trend is sure to end soon, it has permanently changed how Americans of all income levels view the Stock Market.
