Reddit Investors Caused GameStop's Stock to Explode and Pure Market Chaos Ensued

The video game retailer's stock skyrocketed to over $300 a share today, jumping a whopping 128 percent
Reddit Investors Caused GameStop's Stock to Explode and Pure Market Chaos Ensued
It's been a wild day on the stock market, and it's all thanks to GameStop and Reddit.

Today, the Texas-based video game retailer began trading at more than $300 USD — despite the struggling company only trading at about $17 USD a share at the start of the month — causing some serious chaos over on Wall Street.

As headlines around the world are now pointing out, this extreme situation came via the Reddit group wallstreetbets, whose members effectively exploited an enormous bet made by hedge funds and GameStop short sellers like Melvin Capital and Citron.

Without bogging this whole thing down in complicated trading lingo, GameStop became a target for short sellers — investors who borrow stock only to later sell it and then buy it back again before returning it to the lender. Basically, these short sellers have their bets on the stock price going down, so that later can make a profit off the whole thing.

In a report released earlier this month, Citron's founder Andrew Left even called GameStop a "failing mall-based retailer," predicting that the stock would plunge to $20.

But thanks to the Reddit group, as well as celebs like Elon Musk, GameStop's stock did anything but go down.

As CNBC reports, GameStop traded at roughly $337 USD per share today when it was briefly halted shortly after 1 p.m. ET — that's up nearly 128 percent from Tuesday (January 26). At some points, the stock traded as high as $380 USD per share. So in case that's still confusing, what's happened is a bunch of Reddit investors have caused the GameStop stock to skyrocket — the exact thing short sellers like Melvin Capital and Citron don't want — and things got messy. Despite the extensive financial damage, however, the short sellers say they have covered most or all of their positions.

CNBC further explains the situation like this:

GameStop's nearly vertical surge over the past week has come as retail traders, many of whom have documented their moves on the social media site Reddit, have piled into the stock and call options. The spiking share price has helped to create a stock squeeze, where shorts and options dealers are forced to buy shares of a rising stock to cover their positions, resulting in a feedback loop that drives the stock even higher.

According to analysis, about 71.66 million GameStop shares are currently shorted — about $4.66 billion USD — and those bets have cost investors about $6.12 billion, The Guardian reports.

Speaking to the UK publication, Ihor Dusaniwsky — a managing director at the data analytics company S3 Partners — called the GameStop situation "unique." Dusaniwsky explained investors were still betting the company's hugely inflated share price would at some point collapse, making them ignore those earlier loses "and using any stock borrows that become available to initiate new short positions in hopes of an eventual pullback from this stratospheric stock price move."

Dusaniwsky added, "Much like the revolutionary war, the first line of troops goes down in a rain of musket fire but is replaced by the troops next in line"

So how is this all going to play out? It's a bit too early to say. But according to analysts, some hard lessons are about to be learned.

"I think the millennials will temporarily be rewarded, and a short-squeeze is definitely conceivable," investor Erika Safran of Safran Wealth Advisors told The Guardian. "The stock can get pushed up so that at some point the short-sellers will fold and make the stock go higher. Eventually, it may trend down to the fundamentals of what a stock like this is willing to accept."

Safran added, "It's ironic to me and other professional advisers that over decades we have moved away from an individual stock-picking philosophy to broad stock diversification, and this is the exact opposite. Investing is not just buying one stock.

"Someone's got to be wrong, but that's what makes a market. I think it will be an education for some and a good story for everyone else."