What happened
Shares of GameStop (GME 1.50%) continued climbing higher on Tuesday, after going up 26% the day before. It went up then because investors found out a famous entrepreneur had taken a significant stake in the company. Today it's going up again because it turns out that person isn't done buying GameStop stock.
Shares have been up and down today. But as of 10:45 a.m. EDT, GameStop stock was trading 10% higher and climbing.
Image source: Getty Images.
So what
RC Ventures LLC is managed by Ryan Cohen. Cohen co-founded pet e-commerce company Chewy and was its CEO until it was acquired a few years back. On Aug. 28, after the market closed, a filing with the Securities and Exchange Commission (SEC) revealed RC Ventures owned 9% of GameStop stock, which sent it higher the next time the market opened.
Today, however, an amended SC 13D was filed with the SEC, showing RC Ventures is still buying stock. It's purchased over 400,000 more shares since it originally filed, increasing its ownership stake to 9.6%.
Now what
As I previously noted, GameStop is one of the most heavily shorted stocks around. This basically means nearly everyone is betting against GameStop. Here's how shorting works in a nutshell: Short sellers borrow shares and then sell them. Once the stock goes down, they can repurchase shares, returning them to their original owners and pocketing the difference.
At least that's how it's supposed to work. It becomes a problem if everyone tries to cover their short position at the same time (high demand), or long-term investors increasingly buy and hold shares (low supply). This combo can send shares higher, and once the snowball starts rolling downhill, it's known as a short squeeze.
RC Ventures has taken almost 10% of shares off the table. With GameStop's stock as shorted as it is, conditions are ripe for a short squeeze. However, there's also the real possibility Cohen can lend his e-commerce expertise to struggling GameStop, improving the long-term business prospects of this small-cap stock.
