GameStop is expected to lose money this year and next year. Sales growth is sluggish as fewer gamers need to go to stores — or even shop online — when they can download new titles directly from their consoles, PCs, phones or tablets. So why are shares of the video game retailer up more than 275% so far in 2021?
The company can thank a loyal group of investors on Reddit who continue to back the stock even as many others on Wall Street have argued that the shares are overvalued and due for a sharp decline.
The stock was extremely volatile on Monday, and it was halted several times. Shares more than doubled at one point, and finished the day 18% higher.
Posters on the WallStreetBets subreddit have been touting the company aggressively. That appears to have helped fuel a so-called short squeeze in GameStop (GME) stock.
A large number of investors have bet against GameStop recently by borrowing shares and selling them with the hopes that they can then repurchase the stock at a lower price and pocket the difference.
That’s a risky strategy: If a stock suddenly spikes higher, short sellers may have to rush en masse to buy back shares or risk losing their shirts. The more that a shorted stock goes up, the bigger the losses become if a short seller doesn’t buy back (or cover) their position. That creates the squeeze.
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