So much for what goes up must come down. GameStop continued to defy gravity Thursday. Shares soared another 30% in premarket trading thanks to massive support from individual investors on Reddit.
GameStop shares are now up nearly 2,500% this year — surging from just under $20 at the end of 2020 to a current price of about $460. It’s largely because of an army of investors who are buying the stock to hurt hedge funds that have bet against GameStop.
The phenomenon is called a short squeeze. An investor who thinks a stock will fall borrows the shares and sells them, with the hopes of buying them back at a lower price and pocketing the difference before paying back the loan.
The problem is that a short seller can be hurt if the stock they borrowed keeps climbing. The losses, in theory, are infinite. So that creates another buying frenzy as short sellers rush to buy back the stock before it moves even higher.
A community on Reddit called Wall Street Bets has been leading the charge against the short sellers. Experts say that the rise of no-fee trading due to the popularity of online brokers like Robinhood just makes it even easier for individual investors to keep plowing into GameStop stock.
The GameStop phenomenon has taken Wall Street — and all of America for that matter — by storm. The White House has said it is looking into the stock’s massive surge. Federal Reserve chair Jerome Powell was asked about it during a press conference Wednesday.
It’s unclear how much longer this short squeeze can last. Online brokerage TD Ameritrade, which is now owned by Charles Schwab, has started to limit trading in GameStop and other shares that have also gotten a pop from the Reddit crowd, such as movie theater chain AMC.
And Wells Fargo’s financial advisory unit has banned employees from making recommendations to clients about GameStop and AMC.
The big concern is that average investors may be ignoring longer-term risks about GameStop as they look for a quick short-term pop.
Although the retailer reported decent holiday results and now has the backing of Chewy co-founder Ryan Cohen, GameStop is still losing money as the sales of video games have increasingly shifted from a cartridge in a box at a physical store to a download model.
“GameStop shares are trading completely untethered from fundamentals and that is dangerous,” said David Trainer, CEO of New Constructs, an investment research firm, in an email to CNN Business.