Have you heard about this crazy stock market situation involving Reddit, Gamestop, hedge funds? Here’s your plain English summary of what’s happening, even if you don’t really know the stock market or investing.
1. There’s a stock term called “shorting.” That’s where you’re predicting the price of a stock will go down, instead of up. If it does, you get to pocket the difference. So if you short a stock when it’s $10 and get out when it’s $7, you make $3.
2. BUT . . . if you short a stock and it goes up, you have to cover the difference. So if that $10 stock goes to $15 and you decide you can’t wait for it to potentially go down again, you need to buy the stock back and cover the $5.
3. Now onto Reddit. There’s a group on there called Wall Street Bets, where amateur investors share stock tips and talk about their day trading successes and failures. And they usually do it through lots of memes and emojis.
4. A few weeks ago, someone on Reddit noticed a hedge fund called Melvin Capital had taken a HUGE short position on the video game store chain GameStop. But there were some indications that GameStop WASN’T in that bad of shape.
5. So . . . the group on Wall Street Bets all decided to buy GameStop stock, driving the price up, and really screwing over that hedge fund that had shorted it. Because now, the hedge fund would have to cover the difference.
6. And it was QUITE a difference. As this GameStop thing really got a lot of momentum and the stock price skyrocketed, the hedge fund wound up losing more than $13.1 BILLION on their short position . . . which was more than their fund was worth.
7. As you might imagine, very serious professional investors and hedge funds were REALLY upset that a group of random people on the Internet managed to make THAT big of an impact on the market.
8. One billionaire hedge fund owner had an interview on CNBC where he called it a, quote, “way of attacking wealthy people and I think it’s inappropriate.”
9. So they started throwing their weight against it. They want new legislation that would make it illegal to do what the Wall Street Bets group did . . . which, I guess, is just talking about stocks on the Internet?
10. Of course, everyone can see through that: Major banks and hedge funds have done all sorts of horrible things manipulating the stock market, and received bailouts when things backfired, like in 2008. THAT’S never provoked real legislation.
Also, even now, two other hedge funds stepped in and propped up Melvin Capital with billions after they got crushed in this GameStop deal.
11. And that’s not all. The Wall Street Bets group started buying OTHER stock that the hedge funds were shorting, like AMC Theaters and Nokia, and several apps like the popular trading app Robinhood BANNED them from buying those stocks.
12. That was interpreted as a direct attack on regular, or “retail,” investors . . . especially since hedge funds could still trade those stocks while regular people were banned.
13. Strangely enough, both parties in Congress are calling B.S. on the hedge fund and elite investors’ reaction to this. But will that strong bipartisan sentiment hold up, especially with trillions of dollars and the richest people in the country involved?
14. So what happens next? GameStop and the other “meme stocks” lost a lot of value yesterday as the apps banned amateur investors from trading it. Congress will most likely get involved in this in some way.
But will this lead to a permanent shift in the way the stock market works, with collections of amateur investors teaming up? Or will the Wall Street powers find a way to stop it?
All historical evidence points to the latter . . . but times are certainly changing.
(Interesting Engineering / Bloomberg / Newsweek / Twitter / CNBC)