Some interesting facts about this week's craziness in GameStop.
For those of you who don't know, GameStop is a video game retailer you see in malls. Their business has been slowly dying off because kids can buy most games online (either via Amazon or direct download). A lot of people equate their business model to Blockbuster's in the late 90s. It was an excellent business for a while, but now technology is making it obsolete.
Why did it go up so much?
Because of a short squeeze.
How did they do it?
1. Pick a small company with a big short position (i.e. people who think the stock is going to fall in value). Think legacy businesses like Blockbuster in the early 2000s.
2. Start buying it as a group.
3. As the group buys, it will push the stock price up. When this happens, the "trading computers" in the market buy it because they assume it is going up for an "efficient, good reason".
4. As the stock goes up, the people who are 'short the stock' (i.e. effectively betting against it), are forced to buy it to "cover" (aka close their bet). This is called a short squeeze.
5. Because the marginal group, the first computers and the shorts are all now buying the stock, more computers think "whoa, this must be big", the stock is rocketing up... BIG NEWS... I need to buy more!
6. That squeezes more shorts, then you repeat, repeat, repeat.
An example of the craziness:
GameStop closed Wednesday with a market cap of $24.24B USD or $31.17B CAD.... Market cap basically means the "value of the company".
That market cap made GameStop bigger than:
SmartCentres Real Estate Investment Trust (the real estate company that owns the majority of the big box malls Walmarts are in)
SNC-Lavalin (engineering company)
Maple Leaf Foods (hot dog, bacon)
Cargojet Inc (freight airliner - basically Air Canada for Amazon packages)
Spin Master Corp (toy company that makes Paw Patrol)
PrairieSky Royalty Ltd (oil royalty company, land owner)
Bombardier Inc (plane and train maker - although they sold the train division)
Leon's Furniture Ltd (they sell couches)
Martinrea International Inc (auto parts)
Aecon Group Inc (construction)
Corus Entertainment Inc (they own Global TV, rights to HGTV, Food network, etc. in Canada)
Sleep Country Canada Holdings Inc (they sell mattresses)
Recipe Unlimited Corp (Harveys, Swiss Chalet, The Keg)
Cineplex Inc (movie theatres)
AutoCanada Inc (largest auto dealership owner)
Dorel Industries Inc (owns a bunch of brands - bicycles, strollers, cribs, etc.)
AGF Management Ltd (mutual fund company)
Baytex Energy Corp (oil company)
A&W Revenue Royalties Income Fund (fast food restaurants)
High Liner Foods (seafood and fish sticks)
COMBINED!!!!!!!!!!!!!!!!