Could someone explain the games stop draw? Apple has over 500 stores while gamestop has over 5500.
It doesn't have a lot to do with financial future of GameStop. It's overvalued as a company almost surely. But it's not a scam company, it's not going bankrupt, but the draw is a certain class of investor bet way too heavily against it that it created an opportunity to take advantage of, GameStop just happens to be the field the game is being played on.
The problem is that Reddit is full of morons, who don't understand a single thing about short sales.
When a stock is 150% shorted, there exist 250% shares of stock. That's because for every short sale, a new long position is created.
It is impossible for there to be more short positions, than there are long positions. [1]
Now, if[2], say 150% of the shares are held by buy-and-forget investors, who won't sell, regardless of where the price goes, a short squeeze is possible (Because there are fewer shares being actively traded, than there are short positions open.)
The thing is, when GME goes to some ridiculous valuation like $300, some of those buy-and-forget investors may be inclined to take their money, and sell. Any half-actively managed fund would be crazy not to.
Are short sellers getting margin-called applying upwards price pressure? Yes. Is that the only source of upwards price pressure? No, there's also a mountain of people with either FOMO, or the hope to unload the stock to a bigger fool. This is rational, in the same sense that investing early into a bubble, or a pyramid scheme is rational.
[1] Unless you do a naked short sell[3]. Reddit screams about illegal naked short selling, without offering a shred of proof, because it doesn't understand the concept mentioned in the paragraph above.
[2] Reddit also has no proof that this is the case, it's just a tribe of apes screaming 'hodl' at eachother.
[3] The only people who naked short sell are market makers, who are incredibly risk averse, and balance their positions out on a regular basis. Hedge funds aren't market makers, and aren't allowed to naked short sell.
That's precisely the whole premise of gamestop's rally. It's weird why you accuse those who state the same as you as being "morons" just for pointing precisely the same fact that you've just pointed out.
> The thing is, when GME goes to some ridiculous valuation like $300, some of those buy-and-forget investors may be inclined to take their money, and sell.
Think for a second: Don't you think that it might just be because of that why "hold" and "diamond hands" is repeated ad-nauseum by those who rally behind the short squeeze?
Perhaps those "morons" might have a point, right?
And whether you collude or defect, you'd still tell others to keep holding, we're all taking down the hedgies together, whatever.
Not really. For your belief to have any basis, you'd need to believe that the whole world was comprised of either WSB-blend of redditors or hedge fund shorters, which is a highly silly assumption.
> But it just takes some defectors to sell
You're somehow assuming that a hand-full of single- or double-digit stock portfolio retail investors are able to manipulate the stock price by selling their residual position.
You're talking about "fantasy" about wins regarding a community renowned for posting screenshots of stock market losses under the premise of "loss porn". You're also talking about the possibility of losing money while talking about a phenomenon with a highly emotional and defiant tone, with multiple and reiterating and recurrent threads about how they don't care if they lose money or withstand massive losses if that means they have a shot at screwing hedge funds and their blatantly manipulative tactics. You're talking about the risk of losses on investments from a community where "exit strategy" is a kin to an inside joke.
In essence, you're trying to find an explanation to a social and political event through the optics of basic conservative textbook investment principles, and your conclusion is that nothing fits your personal explanation.
Diamond hands might force short sellers to pay high prices to cover. But they pay those high prices to the people who sell, not to the people holding. Those sellers are the real winners -- well, them and anybody who shorts it again at the peak. Are they other hedge funds? Retail investors with "paper hands"? Who knows. All that's obvious to me is that if you're the last to sell, the only person you succeeded in screwing over is yourself.
You're free to ignore or downplay whatever facts you'd like, but it takes a lot of will power to turn a blind eye to the political and protest aspect of gamestop's stock purchases.
You're talking about a bunch of small WSB-like retail investors who purchase half a dozen stocks with their disposable cash because they feel that contributes to evil hedge funds of the likes of Melvin Capital to lose half their cash on their manipulative shorts. You're talking about people who look at gamestop's stock as a high-risk investment where the payoff is not cash but screwing big financial companies out of their cash.
It's like you're watching a parade or a protest march and you're there wondering why all those idiots are just standing there instead of running to win the race. The point of a protest march is not to ensure that your everyday flow stays neatly predictable, is it?
To be clear, the make-a-buck version of events DOES make sense to me. I'm not standing here going "why are these people all doing this irrational thing?". It makes perfectly rational sense if they really do plan to exit, regardless of what they joke about in memes. It's not a game everybody can win, but there are some big winners paid for by the long tail of losers holding the bag at the end, and everybody can try to time the bubbles to make themselves one of those winners.
On the other hand, the "I'm fine with taking a loss because at least I stuck it to the man" version makes no sense to me.
If you buy and hold, and your diamond hands cause you to miss the window of profitability, you are helping somebody else who does sell get a better price for their shares. All you know about that person is that they DON'T have diamond hands. They might just be another hedge fund. Helping an unknown fund that's long make money off some other unknown fund that's short is... something... but I don't see how it's an effective protest.
I guess it makes some amount of sense if your definition of "evil" is just short-selling, so somehow long funds are "good" and short funds are "bad". I admit I have seen that sentiment floating around. It doesn't make any sense, but it is out there, so I'll grant that at least a few shares have been bought on that belief. Again, I think the most charitable interpretation is that most price movement is not driven by people with such a naive idea about shorts and longs, but I could be wrong.
The thing is, I don't think the winners are mostly getting rich off the backs of short sellers. They are getting rich off the backs of other retail investors, most of whom are losing money, because they buy in at $220, hold through $300, and then diamond hands the drop to $50.
I understand why people with an exit plan are screaming at everyone else to hold. They need everyone else to hold, so that their exit pays off. This is why I assume they are spreading FUD, and misinformation about how short sales work.
I don't think your definition of winners applies here, because for some this isn't really about making a quick buck. There's a whole class of WSB-based stock purchasers who buy/bought stock in protest, and don't care at all if they lose 200$-2000$ in this as long as they see hedge funds hemorrhaging cash.
For them, winning is seeing the likes of Melvin Capital wasting half of their cash on a failed short.
https://edition.cnn.com/2021/01/31/investing/melvin-capital-...
And that's something they don't mind paying 2000$ to see.
That class of WSB should open their eyes and realize that hedge funds on the long side of the trades aren't hemmorhaging cash. Those funds are happily taking WSB cash, and laughing all the way to the bank.
As a form of social protest, giving your money to a hedge fund seems to be an odd one.
For some mysterious reason, though, the WSB narrative is that all the hedge funds are on the short side of these trades. Again, no proof is given for this statement, it's just a magical incantation that the tribe keeps repeating.
... Or, it's something that people hoping to get rich from a pump and dump keep repeating, so that bigger fools drive the stock price up for them, and they can cash out. If I were one of those people, that's what I'd be doing.
Disclaimer: I have previously bought/sold GME purely out of personal interest for the phenomenon (and have no position in it now, nor do I have a plan to buy any more), but this is not financial advice.
These people have essentially borrowed shares and sold them on the market (short sale), and are waiting at some time in the future to buy them back. The idea is they will buy the stock back at a much lower price than they originally sold them for.
The people holding the IOUs for gamestop stock are paid regular interest payments. These payments are relative to the price of gamestop. The higher the stock price goes, the higher the interest payments are.
When the stock skyrockets like this, a positive feedback loop is generated (called a short-squeeze), people want to buy back shares to stop their interest payments on the IOUs. And if there aren't enough shares available, the price spikes. Eventually, the market cools off and the price plummets back to earth.