A simple thread to explain the ongoing rally in the US listed company #GME (#GameStop) and the massive #shortsqueeze 👇🧵 (1/n)
Before we get into the details, let us understand few concepts first.
A. What is free float?
B. What is short selling? (2/n)
A. What is free float?
B. What is short selling? (2/n)
A. What is free float?
The total shares held by all the shareholders of a company are called as outstanding shares.
Now, of the total outstanding shares, there are few shares which are not traded actively. (3/n)
The total shares held by all the shareholders of a company are called as outstanding shares.
Now, of the total outstanding shares, there are few shares which are not traded actively. (3/n)
For instance, shares held by promoters or large funds who do not sell them easily are not available for sale.
So say if 60% of the outstanding shares of a company are held by promoters and large funds, then only 40% shall be the free float. (4/n)
So say if 60% of the outstanding shares of a company are held by promoters and large funds, then only 40% shall be the free float. (4/n)
Free float refers to the shares that are available for trading.
Lesser the free float, more the volatility of a share.
The logic is simple. If there are few buyers and sellers trading, then the price will tend to be more volatile. (5/n)
Lesser the free float, more the volatility of a share.
The logic is simple. If there are few buyers and sellers trading, then the price will tend to be more volatile. (5/n)
B. What is short selling?
In short selling, one sells the shares first and then buys them.
For beginners it may sound impossible but this is a popular concept in stock market. (6/n)
In short selling, one sells the shares first and then buys them.
For beginners it may sound impossible but this is a popular concept in stock market. (6/n)
Needless to say, if one is selling first and buying later then the person is of belief that the share price is going to fall in future. Hence the plan to sell high first and then buy at lower price later. (7/n)
Let me put a simple analogy to help this understand better.
Say, a mango costs ₹10.
Say, I am of the opinion that the price of mangoes is going to fall.
I see this as an opportunity. (8/n)
Say, a mango costs ₹10.
Say, I am of the opinion that the price of mangoes is going to fall.
I see this as an opportunity. (8/n)
I approach a person having mangoes and I borrow mangoes, promising to pay him interest for this borrowing.
I then sell the mangoes to another guy for ₹10.
I wait for the price fall. Say, the price falls to ₹5.
I buy at this price and return the mango to the lender. (9/n)
I then sell the mangoes to another guy for ₹10.
I wait for the price fall. Say, the price falls to ₹5.
I buy at this price and return the mango to the lender. (9/n)
That's what you do when you short stocks.
👉You borrow them first and have to pay interest on the borrowing.
👉You then sell them to another buyer.
👉You later buy them as price falls.
👉You return it to the lender. (10/n)
👉You borrow them first and have to pay interest on the borrowing.
👉You then sell them to another buyer.
👉You later buy them as price falls.
👉You return it to the lender. (10/n)
The only catch here is if the price rises instead of your idea of it falling in the near future, you may run into losses.
Not just losses, the quantum of losses can be huge! As there is no limit for a stock to move up. It can reach sky! (11/n)
Not just losses, the quantum of losses can be huge! As there is no limit for a stock to move up. It can reach sky! (11/n)
So then what exactly happened with GameStop?
Firstly, GameStop is a brick and mortar video games retailer. It has physical stores where it sells games.
The company was not doing well and then covid hit it badly. (13/n)
Firstly, GameStop is a brick and mortar video games retailer. It has physical stores where it sells games.
The company was not doing well and then covid hit it badly. (13/n)
Big funds thought this as a perfect shorting opportunity and the stock therefore tumbled. (14/n)
But, in 2020 two good things happened for GameStop.
1. Ryan Cohen, founder of pet food site Chewy.com bought a 12.9% stake in GameStop for $76 million.
2. GameStop announced multiyear strategic partnership with Microsoft. (16/n)
1. Ryan Cohen, founder of pet food site Chewy.com bought a 12.9% stake in GameStop for $76 million.
2. GameStop announced multiyear strategic partnership with Microsoft. (16/n)
That's not just it. The website #reddit had a role to play here.
Apparently, there is a subreddit by the name #wallstreetbets with 2 million members.
So, GameStop was a stock that was being discussed on this forum. This caused huge retail participation in the stock. (17/n)
Apparently, there is a subreddit by the name #wallstreetbets with 2 million members.
So, GameStop was a stock that was being discussed on this forum. This caused huge retail participation in the stock. (17/n)
Not just this. The retail investors kind of decided not to make these shares available for sale easily. That would mean lesser shares for trading and therefore the free float would fall.
Now that is where the short squeeze comes into picture. (18/n)
Now that is where the short squeeze comes into picture. (18/n)
Remember, when I discussed about short selling, the short sellers need to buy the share to cut off their position.
In case of GameStop, the free float is just 33 million shares and there is a total net short of close to 237 million. (19/n)
In case of GameStop, the free float is just 33 million shares and there is a total net short of close to 237 million. (19/n)
The short sellers are desparately trying to buy the shares to cut their position and reduce their losses but there is just too much demand and too little supply.
That's why we are witnessing such a massive rally here. That's basic economics. (20/n)
That's why we are witnessing such a massive rally here. That's basic economics. (20/n)
This is a unique situation. The moment the short sellers are trying to buy shares, they are actually pushing the stock price higher. That also means more losses to them!
That's all because of 'Short Squeeze'. (21/n)
That's all because of 'Short Squeeze'. (21/n)
This exactly happened in case of Volkswagen in 2008 which made it the most valuable company in the world for a short span of time. (22/n) 
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