The GameStop Bubble Is a Lesson in the Absurdity and Uselessness of the Stock Market

Who knew GameStop would itself become such a game?

Last summer, the video game retailer was seen as a fading brick-and-mortar operation. It was losing money, sales had been shrinking for years, and the stock was trading for around $4 a share. As I’m writing this on the afternoon of Wednesday, January 27, its stock is trading at $339 a share. At the close of trading on Tuesday, it was a mere $148. Not a bad overnight return, 129 percent. Three days earlier, it was at $38. It was up nearly tenfold in less than a week. Why?

To answer that requires explaining the concept of short selling, which most civilians find nearly incomprehensible. A short sale is a bet that a stock (or any other speculative asset, like bonds or gold) is going to decline in price. But to make that bet, you have to sell something you don’t already own, which is not normal behavior. To accomplish this, you have to borrow the stock from somebody who does own it. As with any loan, you have to pay interest on the borrowed asset. And you also have to keep some collateral on deposit with your broker as an assurance you’re good for the money. The hope is that the price will fall, and you can buy the shares — cover the short, in the jargon — at a lower price. Your profit would be the difference between the original sale price and the closing purchase price, minus any interest paid on the borrowed asset.