How $15 Billion Evaporated: The GameStop Short Squeeze

One of the oldest and most basic stock investing maxims is “buy low and sell high.” The strategy is simple - purchase shares in a company, hold the shares, and then sell the shares at a higher price in the future.

An alternative strategy is to “sell short.” Short sellers borrow and immediately sell shares they did not own, in anticipation of purchasing (“covering the short”) and replacing the shares later at lower prices, achieving a profit by “selling” high and then “buying” low.

While short selling is legal, it is fraught with risk. An increase in the stock price of the borrowed shares can force the short sellers to cover the short and purchase shares at prices higher than what they were initially sold for, creating a loss. in extreme cases, the pace of forced purchases result in a “short squeeze” where the short sellers race to purchase shares at ever-increasing prices, causing massive losses for short sellers.

In January 2021, international financial news was dominated by a massive run-up in the stock price of GameStop, a struggling computer game retailer. Between January 11 and January 29, the stock price increased from $20 to $325 a share. Underpinning the stock price increase was an unprecedented “short-squeeze” of large hedge funds that had made huge bets that GameStop stock prices would decrease, and had borrowed and sold over 140% of the outstanding shares.

At the center of the short squeeze was the “Reddit Revolution” an army of individual small investors and day traders who bought GameStop stock in anticipation of large price increases – pitting themselves against billion-dollar Wall Street hedge funds.

Within several months GameStop stock was less than $60 a share, then fell to $22 a share in May 2023, erasing tens of billions of dollars of market capitalization.

This webinar will review the background of the run-up and subsequent decline in the GameStop share price, exploring the use of stock trading apps and online discussion sites, celebrities such as Elon Musk, congressional investigations, and alleged conflicts of interest.

This webcast is applicable for accounting and finance professionals at every level in public, governmental, and private practice. There are no prerequisites.