While the major indices may be losing ground, former beaten up and heavily shorted stocks in the US continue to experience wild swings amid a battle between a group of traders on Reddit and hedge funds.
Computer game retailer GameStop - or ‘GameStonk’ as Tesla founder Elon Musk dubbed it in a recent tweet - has been the most high-profile beneficiary of this battle moving to a market cap in the tens of billions of dollars.
Its shares fell 13.3% to $300.16 on Thursday (28 Jan) before trading in the stock was suspended soon after the US markets opened.
Some of the other names that have been attracting a lot of attention in recent sessions also lost favour, with cinema operator AMC Entertainment trading 31.9% lower at $13.55 and Blackberry falling 25.1% to $18.70.
Several investment platforms including Robinhood have imposed restrictions on trading in certain stocks caught up in the hype, whereby shareholders will only be able to sell rather than buy more.
Robinhood says the restrictions apply on its platform to stocks including AMC, Blackberry, Bed Bath & Beyond, Express, GameStop, Koss, Naked Brand and Nokia.
Attention is now turning to other stocks that have been heavily shorted name including American Airlines which jumped 25% to $20.68 partially because of a reasonably solid trading update.
Short selling involves taking a bet that a stock’s share price will decline. In this case hedge funds effectively borrow shares from someone else for a small fee, sell them to raise capital and buy the same number of shares again at cheaper price in order to return the stock to the original lender, keeping the difference in price as profit.
If the shares go up in value then the short seller will either have to put more cash into their trading account to keep the bet going or be forced to buy stock at a higher price in order to close out their position.
The forced purchase is known as a short squeeze and this is what the ‘Wallstreetbets’ Reddit forum seems to be trying to engineer. We discuss the topic and the wider market context in this article.
