In late January, Redditors took to buying GameStop stocks in order to save the ailing company that was being bet against by large hedge funds.
After several big hedge funds bet against GameStop stock, essentially meaning that they would profit from GameStop’s failure, a group from Reddit called WallStreetBets took to buying stocks in order to keep GameStop afloat.
As the WallStreetBets bought up GameStop’s stock, GameStop’s share prices rocketed by around 1000%. Through this intense increase the hedge funds that bet against GameStop lost billions of dollars.
When big investors lose their money, it can cause stocks to crash. While many on social media platforms like Twitter and Reddit felt it was wrong to bet against a company the way that the big hedge funds bet against GameStop, it is a common practice.
On Jan. 30, author and Co-creator of Crash Course, Hank Green, explained in a thread on Twitter why “shorting” or betting against companies exists.
“When someone is able to bet against a stock, rather than just sell it, that provides incentives for them to find problems within the company,” Green said.
These problems could be a company reporting fraudulent numbers, mistreating workers or even creating dangerous products.
“However, some of these investors and hedge funds do nefarious things to find so called problems in companies in order to bet against them,” Green said. “They lie, they make guesses, create false narratives and they manipulate” [in order to make money.]
Billionaires hate shorting and say it should be illegal, but not because they are looking out for the little guy like WallStreetBets, as people like them would like to believe.
“[Billionaires] just want fewer pains in their asses,” Green said in his Jan. 30 Twitter thread.
GameStop was one of the companies that were most shorted compared to all of the other publicly traded companies. Other companies on the list include AMC Theaters, Bed Bath & Beyond and even Blockbuster.
After that, GameStop became the source of a short squeeze. A short squeeze, as explained by Tarleton Economics professor, Dr. Omar Esqueda, occurs when the stock goes up in price [having a negative effect on the short sale position], hence brokers demand more money to increase the margin (i.e. a margin call) so investors maintain their short position.
When the increase in price is substantial, investors sometimes decide to buy back the stock at a higher price than they initially sold it for. This later causes them to realize the loss on their trade. Many of the short sellers consisted of hedge funds that had bet against GameStop, and ended up getting caught in the short squeeze.
This does lead to some concern whether this type of activity among investors is illegal. However, there is still a current debate happening on the subject.
Following GameStop’s sudden spike, many investors have the potential to lose everything.
Even with the WallStreetBets’ effort to save GameStop, the stock surge is a “grim reality of its prospects,” Associated Press writer, Anne D’Innocenzio said. “The video game retailer is floundering even as the industry around it is booming.”
As time passes, Gamestop’s value is sure to constantly increase. It is important to remember that stocks rise and fall significantly throughout every day. If you are interested in investing in stocks yourself, there is an app available in the apple and android playstore.