GameStop stock (GME-NYSE) spiked more than 100% as retail investors get caught up in the hysteria.
The wild trading sessions over the past few days is what Wall Street calls a “Short Squeeze“.
A short squeeze happens when a short seller (someone betting the stock price will fall) buys back their short position in a hurry. Why? Because a rising stock price is bad news for a short seller. No doubt, short selling is a common trading strategy Wall Street. But, it comes with big risks. Truth be told, there is no limit to risk as a short seller.
Suffice it to say, a short squeeze means some short seller (or a bunch of them) are losing a ton of money and to stop the bleeding they’ve got to buy the stock back at any price. As a result, the price spikes to ridiculous levels.
According to CNBC, Melvin Capital was the hedge fund behind this chaos. Not only that, the fund needs an additional $3 billion in capital to shore up its finances. Yikes!
More importantly, a legion of online retail investors joined forces using the Reddit forum “wallstreetbets” to coordinate their buying efforts. If effect, bullying the Wall Street hedge fund.
Truth be told, this time around it’s the hedge funds getting whipped by the retail investor. Perhaps a little taste of their own medicine for a change.
But danger is lurking on the horizon for this new breed of vigilante retail investor.
The chart above is one of a parabolic price move. Parabolic moves of this nature never last. Checkout bitcoin’s price chart and see what happened after its parabolic move. Crash!
Conclusion
All things considered, GameStop (gme stock) is not worth $322 per share. Not even close! In any event, the important lesson here is to understand how a short squeeze works.
So, will the retail investor legion get out before the crash? I don’t know, I doubt it. One thing is for sure, I’d be cashing out today at these prices and searching for greener pastures because this is going to end ugly.
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