What's the deal with Gamestop (GME) and the flurry of big upside in a number of other stocks this Week? (thread)

In brief, some big investors (hedge funds) borrowed shares of GME and sold them "short," expecting shares to decline. They planned to then buy shares at lower prices and make millions. They were wrong.

The hedge fund's idea, that GME is troubled and its shares could decline further, was reasonable. But their strategy, shorting, is risky. If you sell short, you eventually have to buy shares back. If prices rise, you lose. GME rose. And rose. At its high today, up 2000% YTD.

Why GME rose so much is novel: online traders, many using a particular Reddit board, encouraged each other to buy. GME went higher and higher. Normally, the hedge fund would sit tight, waiting for the small investors to exhaust their capital. when they did GME would fall.

But the hedge fund misjudged to online traders. As GME kept rising, the hedge fund finally had to "close its short" meaning they bought back GME at much higher prices. The hedge fund lost BILLIONS. Yup, billions. https://www.chicagotribune.com/business/ct-biz-reddit-wall-street-bets-gamestop-melvin-capital-20210127-qk6uwmw5bze35dmvpx7xbgsyf4-story.html

I suspect that other institutional "savvy" investors also shorted GME and are suffering losses similar to Melvin Capital, and least in proportion to their investment. Here's why:

Unlike buying, where you can just hold forever if you wish, when you short a stock, you have borrowed the shares from someone. If the stock rises (and GME has skyrocketed) that someone may want their shares back, so they can sell them and make a profit.

When that happens you could be forced to buy back the shares you sold short so you can return to the person you borrowed them from. You're forced to buy, even if you don't want to, even if you're losing your shirt. That's why shorting is so risky.

There's gloating among the online trader crowd, having beaten a big hedge fund at their own game. Fair play to the traders, they won! But here's a big caveat:

The buyers pushed GME up, and forced the hedge fund to buy, pushing shares up further. Once the hedge fund has closed its short, will there be enough buying interest to keep the share price high?

The music is still playing. If you own GME shares, listen carefully and be sure you're near a chair when that music stops. Then enjoy your profits! And pay your capital gains taxes :)