The recent GameStop stock situation was brought to the House of Representatives for a hearing Thursday.
Tyler Jensen, assistant professor of finance, shared his thoughts on the situation and broke down what happened.
“In my opinion, there was some very significant pressure on GameStop’s stock price because lots of people and lots of financial institutions had negative perceptions about the business going forward,” Jensen said. “And so what happened is there was a big buildup and short-selling interest on the stock.”
Jensen defined short-selling as people betting and attempting to profit from stock prices declining. He also shared this was not only happening with GameStop stock, but GameStop was the stock this was mainly happening to. This can lead to a short squeeze event.
“There is so much short pressure from all these short sellers that if the stock price starts moving upward now, short sellers either have to come up with more capital to cover their positions or they have to sell the stock — or, to be more specific, they have to buy those shares back to close out their short position, which creates this short squeeze traumatic run-up of the price,” Jensen said.
Reddit users realized many institutions had these short positions, so they encouraged people to start buying GameStop stock in order to force this short squeeze.
Robinhood, an investing app, began limiting the amount of GameStop stock users could buy because they could not keep up with the demand.
“In my opinion, they weren’t able to keep trading open as opposed to they did not desire to keep trading open,” Jensen said. “It was such an extreme event, and they did not have the capital base to be able to handle that amount of volume and that amount of volatility.”
Jensen is not sure what the outcome of the hearing will be, but he said he would be surprised if nothing comes from it since so a lot attention has been given to this situation.
“If Robinhood truly did not have the capacity or the capital to continue offering trades in these securities, there is not much they can do other than shut it down,” he said. “But, if there are some other, more nefarious things that come out, then you can see people get in some pretty serious trouble.”
Robinhood’s CEO, Vlad Tenev, apologized for the situation during the hearing. Tenev also declined to answer multiple questions.
“I think the GameStop situation was very, very unique,” Jensen said. “The short interest in GameStop was extreme. There were cases and there still are cases where over 100 percent of the available shares had already been shorted. That’s a huge amount of short-selling pressure, which is why we saw this huge spike. That is unheard of having that amount of short pressure. If you get up to even a 20 percent or 30 percent short ratio, that would be a lot of short selling pressure, so over 100 percent is very, very abnormal. So, I don’t expect to see something that dramatic in the future.”
Jensen added he expects people to be looking for the next stock to receive attention from social media users.
Jensen highly recommends doing your own research prior to buying stocks.
“You always have to be cautious and consider the source of where you’re getting information,” he said.
He added that someone could be giving a great tip or they could have a vested interest in that particular stock where people buying more would help them.
“The one nice thing about publicly traded companies/publicly traded stocks is that these corporations have to publicly disclose all their financials, all their information, all these sorts of things,” Jensen said. “So, if you desire to go learn about a company, all that information is out there and available for you.”
This allows for more transparent research and gives you the ability to understand and see why a stock is worth your investment or not.
Jensen also recommends diversifying your investments and never investing money you cannot afford to lose.