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.
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.
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.