GameStop’s current inventory was brought to the House of Representatives for a hearing on Thursday.
Tyler Jensen, assistant professor of finance, shared his thoughts on the situation and broke down on what had happened.
“In my opinion, there has been very significant pressure on GameStop’s stock price as many people and many financial institutions had negative ideas about future business,” said Jensen. “And so it so happened that the stock built heavily and shorted.”
Jensen defined short selling as people who bet trying to take advantage of falling stock prices. He also shared that not only did this happen to GameStop stocks, but that GameStop were the stocks that primarily did this with it. This can lead to a brief squeeze event.
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“There’s so much pressure from all of these short sellers that if the stock price moves up now, short sellers will either have to raise more capital to cover their positions, or they will have to sell the stock – or more precisely, they will have to buy back those stocks to close their short position resulting in a traumatic spike in price, ”said Jensen.
Reddit users realized that many institutions had these short positions and encouraged people to buy GameStop stock in order to force this short squeeze.
Robinhood, an investing app, began limiting the number of GameStop shares users could buy because they couldn’t keep up with demand.
“In my opinion, they were unable to keep the trade open as opposed to not wanting to keep the trade open,” said Jensen. “It was such an extreme event and they didn’t have the capital base to be able to do it.” Handle that amount of volume and that amount of volatility. “
Jensen isn’t sure what the outcome of the hearing will be, but he said he would be surprised if nothing came of it since so much attention has been paid to this situation.
“If Robinhood really doesn’t have the capacity or the capital to continue doing business in these securities, there isn’t much they can do but close them down,” he said. “But if there are other, more nefarious things that do that.” Come out then you can see people get into pretty serious trouble. “
Robinhood CEO Vlad Tenev apologized for the situation during the hearing. Tenev also declined to answer several questions.
“I think the GameStop situation was very, very unique,” said Jensen. “The brief interest in GameStop has been extreme. There have been cases, and there are still cases, where over 100 percent of the available stocks have already been trimmed. That’s tremendous short-selling pressure, which is why we’ve seen this tremendous surge. That’s unheard of when you have so much short pressure. If you even get a short ratio of 20 percent or 30 percent that would be a lot of short selling pressure, so over 100 percent is very, very abnormal, so I don’t expect anything that dramatic in the future . “
Jensen added that he expected people to search for the closest inventory to get social media users’ attention.
Jensen strongly recommends doing your own research before buying any stock.
“You always have to be careful and consider where you get information from,” he said.
He added that someone could give a great tip or have a vested interest in this particular stock that people who buy more would help them out.
“The beauty of public companies / publicly traded stocks is that they have to publicly disclose all of their financial data, all of their information, and all of that stuff,” said Jensen. “So, if you want to learn about a company, all of this information is out there and available to you.”
This allows for more transparent research and gives you a chance to understand and see why a stock is or is not worth your investment.
Jensen also recommends diversifying your investments and never investing money that you cannot afford to lose.