We’ve all probably heard of the famous GameStop stock by now. For those who don’t, Gamestop, a relatively dying stock, just skyrocketed to 347 dollars per share from just a small average of 3 dollars from the past year.This is not natural and toxic to the economy, teens overnight became millionaires, investigations have begun into why it’s happened, and investors are waging a war with a subreddit on Reddit.
But what is actually happening? Well, a common tactic for investors is short selling; very simply put, short selling is the act of betting that a certain stock will decline. Redditors took this very simple concept, and toppled it by just telling people to invest in GameStop. With the power of social media, they blew up the GameStop stock by over 1000%. By telling everyone to buy the stock, demand skyrockets, and so does the price, optimal for quick selling. Short sellers make their profit by subtracting the price of the stock bought and the price of the stock sold, so naturally, hedgefund managers wouldn’t be too happy seeing themselves in a very deep hole of debt. They are in debt because of the short squeeze of the GameStop stock, with more and more people buying into the idea of instant money, the finite amount of stock can’t support everyone, and because those who are buying in all the craze actually own the stock, hedgefunds are nearing bankruptcy because they can’t pay back the stock.
This is troubling because a stock that averaged 3 dollars in 2020 just became equal to a S&P 500 stock, essentially breaking the system. Even more troubling, is the politics involved now. An economic battle is happening, a David and Goliath scene of redditors toppling the kings of the stock market. To stop this from happening again, regulation must be placed to prevent an imbalance. Here are the two sides and their reasoning.
Let’s call the profiteers the Redditors.
They are people stuck at home in a pandemic looking to make money.
They feel oppressed by the hedgefund corporations
Found public information of possible corruption in headfunds
And then the hedgefunds.
They are rich people who know their way around the market
They just almost lost all their money to a loophole
But Melvin Capital (hedgefund in question) illegally short sold 120% of the finite GameStop stock
8 comments:
Looking at this from a behavioral perspective, I see some very interesting trends happening. We are living in unprecedented and extremely interesting times. Technology such as social media has connected humans to the societal systems that shape us (ex. stock market, transportation, etc.). In this specific instance, while before one had to physically buy stocks (an action of much effort), now humans can buy them with a simple click of a button-- making the stock market accessible to the masses. The new ease of buying stocks has introduced an interesting behavioral phenomenon: instant gratification. Its effect on decision-making patterns is still being studied; however, I think it is in part responsible for the stock fluctuation. Thousands of individuals impulsively made the decision to buy the stock, causing a short squeeze, leading to the situation that unfolded. I think a really big challenge the stock industry faces (ex. RobinHood, e-trade), is that while increasing accessibility and ease to buying stocks, how to keep the market stable.
This is not troubling, this is a revolution. Investment involves risk, and anyone who chooses to invest must be willing to accept the consequences. For a long time the rich have been practically immune to the downside of investing, only making profit. In the circumstances we see here, the hedge funds have simply been outplayed by these Robinhood investors. While short selling is a common tactic, it also involves a great amount of risk. In general investments you can only loose as much as you put in, but with short selling, in theory, you can loose a nearly infinite amount of money. This short squeeze is not an anomaly either, short squeezes do happen, however, generally between other hedgefunds and professional investors. What we are seeing is small investors finding a way to banned together to fight against these huge hedge funds. The hedge funds are loosing an incredible amount of money, and rightfully so. That is the name of the game and this is what happens when you invest. I don't think there is anything for the SEC to do here because redditors are not doing anything illegal by buying GME. On the other hand, the shutting down the sale of GME is the definition of a restricted market, and they doing it purely to protect the hedge fund. That is the illegal activity that needs to be controlled, and Robinhood and the hedge funds should be in big trouble. All in all, this is a big success for everyone, and will help change the way that the stock market is currently used to benefit the rich. I think it is great the the stock market is becoming more easily accessible to everyone. That is the way democracy should be, and hopefully will lead to an era where more people can become financially free.
I think that small investors are in the wrong for abusing a loophole in the market. Even though the market is inherently biased, they are still causing more market trouble than good in the long run. Hedgefunds, however, are also wrong to accuse small investors while knowing that selling is dangerous because they are treating it in a biased manner and trying to make it limited to only the powerful. The rich investors, more often than not, have always seen small investors as a threat to business, such as the situation now. More small investors to them makes selling and buying stocks relatively harder(due to more competition), which they don't like. This is an interesting case and I wonder what will happen over the next few days. Thank you for sharing!
Oh no. The people at the hedge funds might have to sell their boats to survive. They knew the risk when they invested, and as Michael said, short squeezing is not uncommon among experienced investors. I think it is also troubling that all the companies have banded together to try to take down the small investors; Robinhood is restricting stock, Discord banned the server where they discussed the stock for so-called "hate speech", and Google is removing negative reviews from Robinhood's app. They are trying to take down the average commoner for what they have done themselves for decades, and from a cultural perspective, a fracture has happened between the elite and the "little guy". They will try their hardest to stop the (figurative) revolution, but I think a precedent has been set here that will hopefully become widespread.
I also want to mention that this event is the most bipartisan thing that has happened in a long time; the fact that Ted Cruz agrees with AOC is something that nobody ever expected to happen.
In the short term, it’s great that capital is being shared. However, I don’t think something like this is going to happen again. The reason this was possible was because of large social media sites that hedge funds did not pay attention to. Now, not only are hedge funds aware of the powerful potential of social media, but are also actively trying to limit them, as Barry mentioned. If new social media sites pop up for the sole purpose of trading discussion, the hedge funds will catch on and be aware of what “the masses” plan on doing. This way, hedge funds can strange their strategies relatively last minute and play other games with normal people in order to ensure that they still “win.” It’s very likely that someone will develop a program that combs through sites like reddit to gather and factor this data in market predictions (and it’s likely that this type of software will be used by hedge funds).
Here’s a couple interesting things to note:
1) Recently, the CEO of Nasdaq said that they reserve the rights to halt trading of a stock if they link it to “social media chatter.” I don’t know how you differentiate “social media chatter” and recognizable patterns (such as more GME stocks being shorted than actually existing) being posted online, especially since large investors already do this in big magazines.
2) This could be a reason robinhood and other investing apps stopped allowing people to buy GME and other stocks: When you buy a stock, it goes through a third party that trades the stock for you. If the person that this third party buys the stock from goes bankrupt, then they can’t make the trade, meaning that they have to buy the stock at whatever the current price is (which is very high since the price is skyrocketing) to pay you back. But since they don’t have enough reserves to do this for everybody that is currently buying, they shut down the ability to buy so that they don’t go bankrupt. Is this a perfect argument? No. Are they still manipulating the market? Yes, but it’s to save the third parties that actually make the trades.
I agree with ben about how small investors are taking advantage of this loophole. It's not the first day that we know the stock market is biased and favor the powerful. But, what they're doing isn't going to be beneficial for the market or their overall investment. But like Barry and Ben said, it's also unfair that big companies are alliancing together to prevent these small invester from joining the market overall, which is understandable because more investors mean more competition for the powerful investors that typically don't want to play with the casual investors. I think it might be possible for something like this to happen again due to the amount of time available to us now and this particular case drawing attention.
I think it's really interesting how connected social media is with so many different aspects of our lives and I think it's crazy that media is what made this possible. I don't really think this is an issue of right and wrong though, but rather a bunch of people saw an opportunity and took it. People know when they are investing that it's essentially a gamble, and with gambling, there is a huge risk of losing money. Like others have previously commented, the market is biased towards the rich and this whole situation shows that there could be a change. That being said, I don't know if tanking the market is the way to go. I don't have a lot of experience or knowledge with stocks, but I do know that the economy is heavily affected by the stock market and I would worry that a sudden overthrow would be dangerous.
In a way, it is amusing to see the wealthy get upset over what these small investors are doing to the stock market. The rich have been the rulers of the system for so long, and it only took a group of people to use the system to beat the system. I think what these small investors are doing is a perfect exercise of their ability to use the free market, and I hope people are able to create this sort of change again in the future. What I find even more intriguing about this situation, however, is the effect the internet, and specifically meme culture, has had on important real world institutions like the stock market. Fifty years ago, this sort of mass online collaboration would not be possible, as the internet is connecting groups of interest more easily than ever. Additionally, the propagation of this information through social media platforms and memes has resulted in even more participation from everyday citizens and has engaged non-investors. Having a stock market icon like Leonardo DiCaprio's portrayal of Jordan Belfort in "The Wolf of Wall Street" has also contributed to a glamorization (and also a critique) of the men on Wall Street, and likely inspired many of the people participating in the GameStop stock surge. Heck, Jordan Belfort is even the icon for the r/wallstreetbets subreddit.
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