It was hard to miss on the GameStop news a few days back when its stocks surged overnight, making it the buzz of the internet and news portals all around.

But what actually happened to transform this company into a phenomenon? And how was Reddit connected with all of this? 

GameStop, founded in 1984 in Dallas, Texas is a company that sells video games and consoles in North America. The stock price of this company used to be $55 back in 2013 only to start its decline over the years, reaching its lowest in May-August 2020, at $4-$6 per share. The Covid-19 pandemic had its effect on GameStop too, making it an interesting bet for Hedge Funds.

Several of these funds thought that the company would go bankrupt and decided to short sell the stocks. Short selling occurs when an investor borrows security (stock, in this case) and sells it on the open market, planning to buy it back later for less money.

How Did The Investors Affect The Stock Trend Of GameStop?

Hedge funds wanted the prices to fall further.

On the other hand, a large number of small investors on Reddit decided to buy as much as possible of GameStop stocks and not to sell them, so that short-sellers (hedge funds) would find it difficult to buy shares to give back to investment companies.

This move made the stock price increase, going against hedge funds plans, and causing them to lose money. Received media attention created a snowball effect making GME stocks skyrocket on January 27, to $347.51. For the first time in history, we witnessed a situation where large hedge funds had to buy back the stock they shorted at any price in order to mitigate their losses and retail investors made a profit off of it. This market situation is called a short squeeze.

GameStop stock prices have since increased dramatically. On that day, GameStop had higher trade value than companies with much higher market capitalization such as Tesla, Amazon, Apple and Microsoft.