What is happening with GameStop (GSP) ? - A short explanation

in LeoFinancelast month

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A long time ago Gamestop was a company mainly selling games on CD/DVD, which is no longer really sustainable, because today a large proportion of games are simply downloaded directly. That's why many large investors thought that Gamestop shares would increasingly lose value and Gamestop might even go bankrupt. A similar thing happened with the video rental company Blockbuster.

Investors wanted to make money on Gamestop's bankruptcy and bet on falling prices (short-selling). In principle, it works like this:

Assuming the share is currently worth 5€. Then an investor borrows a lot of shares, pays a kind of lending fee and promises to return them in half a year at the latest. Instead of simply keeping the borrowed shares, however, he sells them on for €5 each. The idea behind this is that if the value actually drops, he might be able to buy them later for 2€, return them, and keep the 3€ difference.

This was done at Gamestop to an extreme extent, because a lot of investors got greedy and were very sure that Gamestop would go bankrupt.

In fact, Gamestop now wants to focus more on the online business, new people have joined the company who have already been successful in the past, and suddenly the prospects are not so bleak after all.

The investors (short sellers) are now getting nervous. When the share prices rise, they have to buy the shares at a higher price and make a loss. In theory, the loss is almost unlimited. It can happen that they have to buy back the shares they sold for 5€ for 100€ or more, when the return date is approaching and they do not have the borrowed shares anymore.

This can lead to a chain reaction: out of fear that the price will rise even further and the losses will become even greater, the first short seller buys shares. But this causes the price to rise even further (increased demand). It doesn't matter to him, he has now received his shares. But now the next one loses his nerve, wants to minimize the losses and also buys more. The price rises even further. And then at some point there are the short sellers who have waited too long and then have to buy shares at astronomical prices completely above value because the lender wants them back. This chain reaction is the "short squeeze."

Many have now bought Gamestop shares to be able to resell them later to the short sellers at overpriced prices. This alone increases the price enormously and there are fewer available shares on the market, so that the short sellers can no longer buy more so easily. The chain reaction is therefore additionally provoked by the buying up of shares.

Whether all this will happen is not guaranteed, and purely speculation at this point. Keep this in mind and never invest more than you are willing to lose!
Stay safe.
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PS: This is my first post ever after lurking here for a long time! Glad to finally contribute :)

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Very good first post! Keep it on.
I remember the VW shortsqueeze that pumped VW-Shares to mor than 1000€ each - crazy thing to see this. I am an infrequent customer of GameStop, mainly to sell old games and buy newer ones - (a practice not possible with downloaded games) but I did not know that they have shares. I will check if there are signs of a shortsqueeze. Thank you for making me aware.

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