Investors who had taken their chance against GameStop stocks and those of AMC Entertainment were appalled by the sudden increase in value of these securities on Wednesday. The unexpected surge of 16% and 19% in the price of these meme stocks has caused short-sellers to incur an accumulated loss of almost $673 million.
As per data from S3 Partners (a financial analytics firm), a rise in the price of these securities has increased mark-to-market losses for this year, thus raising the figure to approximately $8.1 billion.
According to Ihor Dusaniwsky, Managing Director of Predictive Analytics at S3 Partners, the mark-to-market losses incurred by Gamestop short sellers on Wednesday were somewhere around $383 million, whereas those born by AMC short sellers were equivalent to $291 million.
Short-selling is a technique that allows one to earn money on the sale of stocks that are owned by someone else. E.g., if a person borrows stocks of a particular company from a broker and sells them to the interested party, the revenue is credited in the seller’s account but instead of paying back the broker, s/he promises to buy them an equal number of shares at a later date. Mostly, the reason an individual indulges in the practice of short selling is that s/he expects the price of that particular stock to decrease shortly. This means they would earn a higher value at the sale but buy back the stocks they owe at a lower price, and enjoy the difference as income or profit.
However, if the price of stocks increases, the seller is still liable to pay back the borrowed quantity and would therefore have to buy them at a higher price, thus incurring a loss. This is exactly what happened with investors who were in-between the short-selling process on Wednesday.
Many analysts have expressed their view that the video game retailer (GameStop Corp.) and the movie theatre chain (AMC Entertainment Holdings Inc.) both have a hand in creating the online hype and ultimately increasing the worth of their stocks. However, there is no proof or surety regarding this since both the securities in question are in fact meme stocks.
Meme stocks are those that see a rise in their financial value due to hype on social media, rather than the performance of their company. This is exactly what happened with AMC and GameStop stocks. Their popularity was fueled by users of the Reddit forum; WallStreetBets.
Discussions regarding different possibilities followed on social media and hashtags as #AMC500k trended on Twitter. Many Facebook users also joined the bandwagon and mocked those affected via mentions like “StockTwits”.