By Bianca Weiser
On Jan. 28, 2021, GameStop’s stock skyrocketed from $39.12 on Jan. 20, peaking to $347.51 on Jan. 27, resulting in large losses for Hedge Funds such as Melvin Capital, who had to close out their short-selling program due to their losses.

Many of us have heard this much before, but what actually happened? What are Hedge Funds, and how do they make money off of lost money? How and why did these investors come together to protect the reputation of GameStop, who’ve been struggling this last year among COVID-19.

It’s important to know that previous to the attack, GameStop was subject to heavy short selling. Short selling is a process carried out by companies such as hedge funds that claim a stock is overvalued and make arrangements to financially gain from a stock’s price going down. They do this by borrowing shares from a lender (such as a pension fund), they then sell the stocks and buy them back once the stock price drops to return them to the lender.

However, short selling can be quite risky. For example, if a short seller borrows stocks from a lender and sells them for a price of $18.84, and the price, instead of drops, rises to $301.16, they lost $282.32 per share, meaning they’ve lost money instead of making it. And, it’s not uncommon for these companies to borrow millions of shares. This process is more similar to gambling on the downfall of a company rather than traditional investing. It’s also important to note that this process gives short sellers incentive to campaign for the stocks overvalued in hopes of driving the price down further.

When hedge funds were campaigning for GameStop’s overvalue, communities on social media, including the Reddit community “WallStreetBets” wanted to send a message to Wall Street claiming to retake the open market and rescue these companies from the grasp of market manipulation.
They successfully orchestrated a tactic known as a short squeeze, with the help of Elon Musk on Twitter, who linked his followers to the community. A short squeeze is where people band together in raising a stock’s price to put pressure on short-sellers.

People from all corners of the stock market banded together. From individuals wanting to send a message to big-ticket investors spotting the opportunity to profit. The short squeeze succeeded in costing the short-sellers billions of dollars.

Although the short squeeze was successful due to its presence on social media, it’s important to say that social media is not the best place for financial advice. Many of those involved in the frenzy were inexperienced and unknowing in the motivations for these processes. In the stock market, a dollar earned by an investor is one lost by a short seller and vice versa. Moreover, the stock is only worth what somebody’s willing to pay.

Is this the awakening of a new open market or is it simply a speed bump for the powerhouse that is Wall Street? Only time will tell for sure. We can say, however, this experience has been an important learning opportunity for our generation’s budding investors.