GameStop in layman’s terms

If you’re confused about what’s been going on with stock-market news lately, especially that tied to GameStop, I tried to explain it as simple as possible.

IMPORTANT DEFINITIONS

Hedge Fund – A hedge fund is an investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction and risk management techniques to improve performance, such as short selling, leverage, and derivatives.

Hedge fund manager put A LOT of eggs into one basket that has the possibility of being dropped and all eggs being smashed and ruined

Short Selling – Short selling is an investment or trading strategy that speculates on the decline in a stock or other securities price. In short selling, a position is opened by borrowing shares of a stock or other asset that the investor believes will decrease in value by a set future date—the expiration date.

If I bet stock ‘Vee Co.’ will decrease in value, I can borrow it at a price of $10. When I borrow said stock, I immediately sell it, hold onto the $10 and wait for Vee Co. to decrease. When Vee Co. stock does decrease, it’s new value is $5 so I immediately buy back the stock I borrowed. I sold it last week for $10, but I bought it today for $5. So, when I give the stock back to whom I borrowed it from and I’ve put $5 in my pocket. Multiply this by tens of millions and this is what happens on Wall Street.

Basically, short selling is betting on stocks losing. If you bet a stock loses and it does, you get rich, rich, rich!

On the flip side, if I borrow the stock and immediately sell it for $10 and the price of that stock rises to $15 then I have to buy back said stock for more than I’ve sold it for. I sold it for $10, but I have to give it back, so I have to buy it back at that $15 price, and I’ve now lost $5. This is why short selling is so risky. If you bet on a stock losing and it increases, you could be out a lot of money.

WHERE GAME STOP / REDDIT COME INTO PLAY

Wallstreetbets on Reddit is a platform for regular folk who try to help each other predict trends in the stock market for their individual trading. These people are what Wall Street refers to as ‘Dumb Money’. It’s possibly someone’s savings. Maybe someone else’s retirement funds. Maybe it’s someone’s inheritance. It’s just regular folk, there’s no hedge funds, these aren’t millions or billions of dollars worth of trades. It’s hundreds, or thousands.

Back in December some members of Wallstreetbets recognized that two prominent hedge funds were short selling millions upon millions in GameStop stock. These hedgfunds were betting on GameStop to fail in 2021. Which, in theory, is not a bad assumption to make, since video games can all be downloaded these days, brick and mortar stores selling hard copies are to 2021 what blockbuster was to 2010.

These Redditors said ‘No way, this is not happening on our watch’. They banded together like a small army knowing that if enough of them purchased GameStop stock, it would drive up the popularity of the stock and drive up the price. Initially the price increases were small. These hedge funds weren’t in hot water yet, because the increase in value of the stock wasn’t anything they couldn’t cover. But, this army of Redditors expanded, both with people hearing about what Redditors were doing, but also with people just noticing that GameStop had had a slight, promising rise and that could be good for them to get in on the ground floor with.

Over the past few weeks, the price per GameStop stock has gone up from $19 per stock to over $400 per stock at one point. Presently it’s hovering around $289 per stock, from what I can see.

So, doing the math with the present value of the stock… if someone borrowed the stock when it was valued at $19 and immediately sold it, they now have to purchase it back for $289. They are out $270 for that single stock in order to purchase it back, to return it to who they borrowed from. Why this is making Wall Street quake is because they don’t trade in hundreds or thousands, they trade in millions, tens of millions and hundreds of millions.

Let’s say, one of these two hedge funds that bet on GameStop losing value borrowed 10 million stocks at $19 each. Their short sale earned them $190,000,000 in December. Now that the GameStop stock is $289, they have to buy back that stock for $2,890,000,000. These Wall Street Hedge Funds are BILLIONS of dollars in to the negatives and they don’t have that money stored away in a shoe box to cover themselves.

One hedge fund has already liquidated assets and begun filing for bankruptcy.

Those hedge funds that weren’t even involved in this particular short-sale fiasco are quaking because they’ve now realized if Redditors have the power to do this one stock, they can do it to any stock. No stock is safe. No short sale is safe. Redditors can do it with any company that Wall Street undervalues. Essentially, Wall Street is Goliath and Redditors are they underdog, and the underdog has just let Goliath know they’re watching every move and they have the power and propensity to knock all of them down like dominoes, if they so choose.

THE ROBINHOOD (AND A SLEW OF OTHERS) ISSUE

There’ve been a few different companies doing this, but RobinHood has gotten the most notoriety, so I’ll share it from the perspective of RobinHood.

RobinHood is an app where individual regular folk like you and I take part in commission free stock trading and investing.

As GameStop stock continued to rise, regular folk like you and I flocked to ‘RobinHood’ to their already existing accounts, or went so far as to make brand new accounts, to get in on this amazing increase in value. Millions of people continued purchasing GameStop in the hundreds or thousands of dollar values. RobinHood, a stock trading application that prides itself on catering to regular folk, something that Wall Street refers to as ‘Dumb Money’, realized that purchasing GameStop was causing Wall Street to bleed. So, RobinHood stopped allowing people to purchase GameStop. You could only sell GameStop on their application, you couldnt’ purchase it.

If RobinHood and others stopped allowing people to purchase GameStop then no one could have access to it. If no one had access to GameStop, the price won’t continue rising, essentially trying to soften the landing for Wall Street. So, RobinHood, that caters to regular folk, blocked regular folk from making money in an effort to protect Wall Street.

CONCLUSIONS

Wall Street is crying foul. They’re crying market manipulation and that what happened should be illegal.

Legally speaking, what Redditors did is not against the law. It is a grey area. Regular folk have realized they can take on the 1% and win.

Why this matters?

  • Millennials and are a hell of a lot fucking smarter than people give them/us credit for
  • The one-percenters are not ‘untouchable’ like they’ve perceived themselves to be
  • No short sales are safe, ever again…
  • A small group of people have the power to vastly effect and change the world which we live, the Redditors have proved that
  • If Redditors could take down Wall-Street so easily, seemingly without them realizing until it was too late, are any industries safe?
  • Your reach is farther than you could imagine. One day you’re a regular joe reading reddit and the next, the stock market is in tears directly because of your forethought

FOOD FOR THOUGHT.

If anyone else has tidbits that I missed, please let me know.

Edit: Sorry for all of the spelling mistakes. I’m fixing them. Slowly.

36 thoughts on “GameStop in layman’s terms

  1. Really clearly explained, said by one who’s studying economy at university 😄 I find so scary that a group of people can easly change the course of shares’ prices.. If they can do it with GameStop, why not with other brands and companies? I think it’s a symptom of a great risk, which is rising everyday more

    Liked by 4 people

    1. I mean… technically ‘a group of people easily changing the course of shares’ is the entire premise of the stock market.
      It’s scary, but it it’s also a good kind of scary in a sense. I’m of the belief that society needs checks and balances, which for as long as I can remember, has never happened with Wall Street. It’s largely owned and run by a small group of people who have always held the puppet strings. This group of redditors motivated millions of people to join suit to cut those puppet strings.

      Liked by 3 people

      1. Yeah, true, but this also means that more people can be hurt, lose money or find difficult to stop. You neee to know how the market works if you want to operate in it. I don’t know, I feel you’re right but i think there are two sides of the same coin

        Liked by 1 person

    1. This was a really great post that quickly covers all the important aspects of this crazy week — and month — of trading.

      I’ll only add two things. Short selling has a limited upside: the amount from the sale. If Vee Co. goes to zero you get to keep all the short profit. But the downside is theoretically infinite. Vee Co. can go up basically forever and any short seller could be out any amount of cash. Limited reward, unlimited risk. And these guys did it with millions.

      The shorts also have more shares shorted than there are shares being traded. Last I heard the short interest (amount of shares shorted/total shares available to trade) is over 100%. Basically if/when they tried to cover their positions there aren’t enough shares to do so! Good ole supply and demand seems to point to GME going even higher as they try to cover which is what everyone is thirsty for.

      Sorry for the rant here; I really get carried away with stocks. Great post!

      Liked by 2 people

      1. This is a good point. I was reading these hedge funds were essentially ‘squeezed’ into buying back the stocks they lost because there literally weren’t enough stock available. (I could be wrong, I think that’s how I understood it)

        Like

  2. The stock market always scared me. At one point I was obliged to invest because there was no other good choice. I sweated and fretted and worried myself sick. Amazingly, something told me to move the small amount of risky investments about 10 days before one of those major plummets. These days I am the proverbial church mouse, so no more worrying about the stock market!

    Liked by 3 people

  3. I sincerely appreciate your eloquently written and straightforward explanation of this sir V. Numbers are like Japanese to me, I stick to what I know, words. That being said, in order for real change to occur, it has to speak the language of the current system. Money and greed. I will keep an eye on these developments and others like them. We will change the system, we have to because it’s only benefited some and must be made for all.

    Liked by 2 people

  4. I’m still confused… I don’t understand economics at all LOL I’m familiar with “pump and dumps” /!: penny stocks but that’s about it. Why did Reddit target GameStop specifically? What kind of answers were they seeking? Maybe I missed something and need to read your blog post again.

    I asked Nick if we had invested in GameStop and he said no. We have Target stock, Disney stock, and a handful of other stocks.

    Liked by 2 people

    1. So, there were a few companies chosen. GameStop is just the one getting most media play so I used it for explanation.

      Other companies include the likes of Blackberry and AMC theaters.

      Redditors in this thread study trends. All short sales are PD, so they could see that these hedge funds were betting on Gamestops loss. People love video games, people love being internet trolls and people love knocking the rich down a few pegs. They took offense to hedge funds going after a nostalgic business to them and betting on their bankruptcy.

      What kind of answers were redditors seeking? None. They just wanted to inflict some pain on wall street. Even if they’d just driven the price up by 5 dollars, 5 dollars times the millions of stocks that were being short sold was a considerable loss to a hedge fund. But they managed to increase it by well, $400 at one point, essentially bleeding two hedge funds dry.

      A lot of regular people earned some decent increased because of this. A few hundred, maybe a few thousand dollars.

      There will be ramifications. But for now, while it’s still in play, we can’t predict those yet!

      Liked by 2 people

  5. 💯Nicely explained… I was trying to understand the whole scene with an example of shampoo… 😅 Lately…

    Indian Stock market is in goldilocks.. As of now.. And our union Budget is on its way.. So thinsgs might stay volatile

    Liked by 2 people

  6. Ah, the power of Reddit (and Redditors)…I’m a noob when it comes to stocks, and I’ve always find it so risky (especially as a very risk-adverse person) that I’ve never even tried dipping my toes into buying stocks. Your explanation of it all is very digestible, and it really is fascinating the news of what happened recently. It’s the power of Millennials/social media against traditional Wall Street that’s tipping the trend of how we do stocks these days– definitely an interesting phenomenon!

    Liked by 2 people

  7. My grandma’s investment tip was not to invest what you aren’t willing to lose. I’m out of the stock market now, but in 1992 I bought shares in a failing company…Apple.

    Liked by 2 people

      1. Too early!! Haha. I sold when my son turned 18 so he wouldn’t have to pay taxes on it (some were in a minors account in his name) around 2010. Apple computers were the best for graphics, but more expensive. You couldn’t get software for them anymore besides a few small stores. It was kind of a loyalty buy, just for a few hundred dollars I figured I was going to lose. I remember telling a friend I bought in hopes that Steve Jobs was going to come back and he did! Kicking myself for selling, then again, it did give my son a hefty down payment when the time came. I didn’t tell him he had it until he was out of college.
        I always invested in stocks of businesses I frequented or used their product. I don’t think I put more than $1,000 into stocks over the years, just a few hundred at a time. Not current with it though, I don’t follow at all anymore.

        Liked by 1 person

    1. What RobinHood did is technically illegal. They ‘controlled’ the value of the stock by not allowing people purchase it, thus holding the price as steady as possible. I’ve been watching a few interviews from the CEO of RobinHood and he is hiding behind excuses right now but he also knows he likely has a class action lawsuit coming his way for halting purchasing of the stock. Redditors are pissed. Regular RobinHood users are pissed.

      Liked by 3 people

  8. Nice explanation V. The power & impact of social media is coming into fruition – not only on the free market but also the free will of the people (think Trump). Maybe this is an argument for more automation in certain critical infrastructures. So the whole society as we know it would not get turned on its head.

    Liked by 2 people

  9. I also have enjoyed this story. I have sympathy for those who lost money in the hedge funds, but not for those running them. They played the risk, underestimated the opponent, and lost. I hope some of the people who had held the stock at a loss made out like bandits. Do we need to change things? Nope, the hedge funds need to remember they are gambling with the money of others. It is a game of sorts, but you have to be good at it.

    Liked by 3 people

  10. Wow, great post! I’m not very knowledgeable in the world of economics and investing so it was great to learn from you! I also wrote an article on GameStop, but from more a community perspective and the sense of companionship that the Reddit group demonstrated. If you have time, it would be awesome to hear your thoughts on my article! Wishing you well 🙂

    Like

  11. Great analysis.

    Another additional thing – not an expert since I’m personally not into stocks, from what I understood, the stocks did not rise up just by Reddit alone. The trigger that Reddit provided led to Hedge Funds panic-buy stocks themselves – which also contributed to the un-natural up-spike.

    Reddit basically did a Judo Move where you use the opponent’s own strength against them.

    —–

    Also, my favorite meme is – “Maybe Hedge Funds should eat lesser Avocado Toast and make Coffee at home, they might be able to afford buy-back of stocks.”

    Liked by 1 person

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