Melvin Capital, the investment firm of Gabe Plotkin, invested in GameStop, whose short bets landed in a huge loss of 53%.
- GameStop is an American retailer specialized in video games, consumer electronics, and gaming goods.
- The intruded online games and not keeping to the market requirement led to the fall of the company. This in turn led the prices of its share to fall.
- This low-value stock of GameStop was utilized by a group of traders. That decided to buy its stock and not sell them. This will lead to the non-availability of shares for short-selling hedge fund firms.
What is Short Squeeze?
When investors short sell a stock, they have to eventually buy it back. Irrespective of the share price (high or low). If a demand for a particular share is created by not selling it, its price will eventually increase. This will lead the hedge fund firms to lose their money and keep the share price increased. This situation is known as a short squeeze.
- Though short squeeze is not a regular thing in the stock market, this has created a lot of impact on the hedge fund firms.
- This short squeeze was the reason behind, Melvin Capital’s huge loss. Though the price of GameStop has significantly reduced, still the traders are holding their stock.
- This incident is considered a digital protest, that has caused many investors to lose their money. GameStop recorded the lowest value of its share in the history of stock marketing.
Questions that were raised by this event?
- Several industry experts started raising questions and sharing their experience about this situation and it created a lot of space for discussion in the online forums.
- This incident has proved that the stock market could be driven by the small traders than the big traders.
- Questions were raised about the way that the financial system works? Are the financial markets manipulated against the small traders? Is the financial system weak towards such incidents?
How he handled the situation?
When questioned about this event, Plotkin, said the firm always abides by the rules and regulations of stock marketing and will continue to do so.
This series of the event has raised the question about small traders going by the analysis of the online forums, rather than them, dwelling into the actual market analysis of the companies. Though the lawsuit is still going on including all the concerned parties, the concerned authorities should strengthen the rules and regulations of the forex trading, to avoid bigger consequences like the global financial crisis.
These are the series of questions and concerns raised from the events between GameStop and Gabe Plotkin , investment firm.