Updated: Feb 3, 2021
Last week was one for the history books and many people unfamiliar with trading stocks, including myself, did not quite understand why.
On Tuesday of last week, a group of internet investors on the subreddit group r/WallStreetBets bought up shares of arguably failing video game store GameStop, driving up the price the company’s stock and effectively making large groups of billionaires lose their money and their sh*t, so to speak.
How much did these investors lose, and how did they lose it?
This is the part that did not make sense to me. I always assumed that by investing in stock, you expect the value of the stock to increase and that is how you make money. To understand why many of these investors lost money, you must understand what short selling is.
To short sell is to bet on a company’s value decreasing. For example: a trader would borrow one share of “Company X’s” stock at $10, expecting the value to drop. The next day, that company’s shares drop to $7 dollars apiece. The trader would then buy the share to replace the one he borrowed, earning the difference of $3 dollars in the process.
This was a surefire way for hedge funds to rake in billions of dollars through market manipulation. Hedge funds through their large buying power have the ability to “pump and dump” stocks to manipulate prices to their advantage.
Independent investors on Reddit took note that these hedge funds, most notably Melvin Capital, had bet money on GameStop’s eventual downtick. This effectively led large groups of independent investors on the internet to buy stock in GameStop, driving up the price over 800%.
This has sent hedge fund billionaires into a frenzy, as the amount of money they can lose is infinite.
“Robinhood” and “Sofi,” two stock trading phone apps used by a multitude of young investors today, suspended trading activities involving GameStop and related accounts. Blatant proof that corporations in place are set to keep the wealthy in power.
The battle is a small victory for the “little guy,” in a world where the rich always come out on top. How will it end? Keep watch.