By now you must have heard about how some traders banded together to bring down a hedge fund, and all through the stock of a struggling games and electronics store. It’s a lesson in the strength of ‘the people’ and their potential to stick it to ‘the man’ if only they act as one.
Without any further ado, let’s get right into it.
What You Need to Know
Without any judgment for your level of understanding about stocks or trading, we’re just listing some basic definitions down below that might help clear your concepts.
Stocks: A stock represents a share in the ownership of a company. The more shares/stock someone owns of a company, the more ownership they have. An owner of a company’s shares can sell these shares to anyone. And should you want to buy a company’s shares, you can get them from these sellers.
hedge fund is a pooled investment fund (it’s the same concept as a mutual fund). Hedge funds are created by investment companies to strategically invest their clients’ money in securities to set them up profitably. This is achieved by investing in alternative securities.
GameStop: A video game and electronics store in America that was struggling so its stocks were predicted to fall.
Reddit: An online forum where anyone can discuss anything for e.g. traders discussing stocks and other securities.
Going Short: Short selling is selling a company’s stock with the commitment to buy them back at a later time. The aim is to buy them at a lower price so that you can make a profit.
Going long employs the opposite strategy to going short. A trader buys stock and aims to sell them when they have increased in value so that a profit can be made.
Short Squeeze: This phenomenon takes place when the value of a security rises unexpectedly and considerably. This pushes those holding short positions, in the hope that it would fall, to buy in order to control their losses.
Supply and Demand: Securities move in the market primarily on the principle of supply and demand. When more people are buying, the demand increases and so the value of a security is driven up. When more people are selling, the supply increases and the security drops in value.
Now that you know the mechanism on which the stock market operates and the main players of today’s story, let’s take a look at what happened.
GameStop, a brick and mortar store, an already dying business had suffered due to the pandemic further. Its stock, which had already dropped to $4 from $57 in 2013, was depreciating still. Big investors (hedge funds) saw this and decided to take advantage by going short. Since they trade large amounts their selling causes enough of a commotion in the market to drive the price down.
That is until r/wallstreetbets directed their attention to GameStop stock. For no clear reason, retail traders on reddit came together and began to buy the GameStop stock. Ultimately so many people had joined this vigilante attempt that the stock price began to grow exponentially. This pushed the hedge funds into a short squeeze. Their consequential buying (to minimize their losses as there seemed to be no end to the stock price climb) resulted in further driving the price up.
In short, through Reddit, retail traders were able to manipulate the market against hedge funds.
GameStop stock value rose 1700 percent in a month. From $3.30 per share, it went up to $347.51. GameStop which was a dying gaming store became a Fortune 500 company. Retail traders who were part of the buying frenzy managed to secure incredible profits.
The price hike was not permanent and by Tuesday, 2nd February, 2021 the stock price had dropped 60% with some platforms banning the buying of GameStop stock.
It is unclear why GameStop was chosen. Some believe it started as any other trade for traders who consult with each other on Reddit and then took on a life of its own.
Some are likening this whole episode to the tale of David and Goliath with the small guy (retail traders) sticking it to the Goliath of investment; Hedge Funds. However, it is not that simple because this episode caused losses for small traders too who weren’t sure what they were getting themselves into. And with Robinhood banning the trade of 8 Reddit favourites, the stocks eventually plummeted.
Whether what happened was right or not and what can be taken from it, it’s too early to say. One thing that is for certain is that it has shown how the market can be manipulated by retail traders as well.
Up until now it was believed that Hedge Funds are market manipulators and retail traders had little choice except following in their footsteps. In this instance, however, the small guys took things in control, albeit for a short while.
This incident even garnered attention of political figures such as Ted Cruz and Alexandria Ocasio-Cortez. Elon Musk too tweeted about it to his 44 million followers.
In the end, the hedge funds are still rich and the retail traders couldn’t overtake them for long and many ended up losing millions. So what was the use of all this? Or was making this statement enough?
This incident will go down in history as the time Reddit traders challenged Wall Street that much is certain.
We hope this cleared up some of the confusion. Also, just a word of caution: things don’t always turn out like this. The fact that the movement was able to rally enough supporters to bring these kind of results was a shocker. It does not mean that next time you see someone talking about stock on Reddit, another one of these is starting. Be careful with your investments!