January 26th the market closed and the already-raising GameStop spiked up from $145 to $371 the next day. How did the near-extinct GameStop become so vastly overvalued? Well at one point it was vastly undervalued as it had been shorted, so much so that it was short squeezed.
Shorting a stock is when you borrow a stock from the bank, pay a security deposit, then give the stock back and get your security deposit back. This can be lucrative because if a stock is constantly declining as you would easily be able to make a profit.
Hedge funds have been shorting stocks to the ground for a while, then people began to catch onto it, this was known by many investors; the investors began to invest in it and it then spread by mouth to the subreddit Wall Street Bets. Wall Street Bets admits themselves to being very idiotic and makes fun of themselves for it, either way, they have made many bad bets (here are just a couple of examples).
I have been in Wall Street Bets for about 4 years just to see what they are doing and I thought GameStop was just another meme like the rest of the subreddit and was going to make them lose money, but people just kept investing more and more.
Wall Street Bets was picking up steam as it was notable that GME (GameStop’s stock symbol) was raised on the Robinhood most bought leaderboard (Robinhood shows the 100 stocks their customers buy) and the entirety of the stock market, Robinhood is the most popular consumer brokerage as it allows for partial shares.
Redditors of Wall Street Bets began buying GameStop stocks on Robinhood, then people outside of the Reddit people joined in, not only buying GameStop but similar stocks like AMC, Blackberry, and Nokia. When everyone thought GameStop was going to go down it kept going up and up, becoming way overvalued in one of the most unprecedented overvalues after being undervalued for so long.
According to cnet, the CEO of Robinhood was on the Good Time Show, a talk show on the audio call app Clubhouse, he stated that the order for GME and Robinhood as a whole had too large of an order request for them to fulfill without meeting requirements for the clearinghouse, which is what validates and finalizes stock transactions, so they had to cancel many orders. Many other brokerages closed or restricted trading of the volatile stocks, including Cash App and Webull (Webull later removed these restrictions).
The people in WallStreetBets were enraged by these restrictions, causing many brokerages to get ridiculed and a lawsuit to be filed against Robinhood; Congress called for a hearing on this and the Government organization that regulate the stock market stated, “[we will] closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”
These events caused the stocks that were surging to grow stagnant or drop heavily. What would have happened had Robinhood not limited the noted stocks? Who knows, the stock market is insane with or without unprecedented short squeezes, a monkey could predict it better than stock market analysts.
I am invested in stocks and cryptocurrency but was not affected much by this, my stocks dropped 5% but then went up 11% as of writing this. Dogecoin is just funny to me, if you do not know Dogecoin raised 700% then dropped and raised even more than that.
The reason my stocks were not affected much is that the only real thing that was apart of the stock craze was Bitcoin and went down slightly then backed up. Other than Bitcoin I mainly have blue-chip stocks (ex. Disney, AMD, Apple, Nvidia, etc.).
This event of short squeezing was one for the books but do not let it discourage you from investing, you can be risky and try to make lots of profit in a short amount of time or you could do what I do and plan to hold stocks for years to come.