One of the David vs Goliath style stories that has taken over social media lately has been the skyrocketing of the stock of video game retailer GameStop due to everyday people going up against the big hedge funds on Wall Street.
What is this all about and how does a beloved Sherwood Forest hero fit into the mix?
The online world, social networking, and technology have definitely changed the power that novices have when it comes to everything from building a website to being able to trade stock. The term for this is democratization of technology, which means that technology is becoming more accessible to more people the more it advances.
People no longer need to be experts or even know any code at all to do things like build a mobile app. And when banded together to use an online trading app, even a 10-year-old can make a few thousand dollars on the stock market.
So, what’s happening with this Robinhood and GameStop story and why does it have Wall Street so upset? We’ll go through the main facts of the story below.
Who Are the Players?
First, let’s go over the main players in the story and that you’ve undoubtedly heard about.
- Reddit: Reddit is a popular online forum and message board with multiple sections where people can post and discuss topics. It has what it calls “subreddits” on topics as varied as abstract photography and sea monkeys.
- Wall Street Bets: Wall Street Bets (aka r/wallstreetbets) is a subreddit where people discuss stocks and is at the center of the story because it’s where the GameStop buying frenzy began.
- Robinhood: Robinhood is a commission-free investing application that allows the everyday person to buy and sell stock via their smartphone.
- GameStop: GameStop is the video game retailer that’s been beloved by many gamers over the years. It’s lately fallen on hard times due to online game rental services like GameFly, among other things.
- Hedge Fund Traders: Hedge funds are investment partnerships that trade aggressively to try to make money. Some of the strategies that hedge fund traders use are long-short equity, market neutral, and volatility arbitrage. (Basically, they do whatever they can to make money on stocks.)
What Happened That Has People Talking?
The story started when the participants of the subreddit Wall Street Bets saw that hedge fund traders were shorting the stock of GameStop. Shorting a stock is a tactic to borrow stock, sell the stock, then buy the stock back at a lower price and return it to the lender.
For this to work, the price of the stock needs to go down so the trader makes money when they buy it back after making the initial sale at a higher price. Shorting often drives the price of a stock down and it can hurt the company whose stock is being shorted.
Banding together, the users of the Wall Street Bets subreddit started buying up shares of GameStop stock in droves. When there is a high demand for stock the price goes up, and in the case of GameStop, it skyrocketed 1,587% since the beginning of January.
How did that 10-year-old and many other everyday traders make money? Because the price of GameStop was low when they began and went up suddenly. For example:
- January 20, 2021: GameStop’s share price was $39.12
- January 29, 2021: GameStop’s share price was $325.00
Any hedge fund trader that had been shorting the stock before this buying frenzy lost a lot of money, because instead of the price going down, it went up, way up! So, they had to purchase back the shares to return them to the borrower at a much higher price than they initially sold the stock for.
Why Are People Mad at Robinhood?
Now, Robinhood enters the picture. Many amateur traders that are just regular people trying their hand at making some money in the stock market use the app. This includes many of those Redditors that had been buying the GameStop stock in droves.
When the executives of Robinhood saw what was happening, they cited “extreme volatility” and suspended trading for GameStop and a few other stocks that Redditors were also buying up (like AMC and Macy’s).
This led many to feel the system was rigged against the everyday person being able to take advantage of the stock market because when “David” had beaten “Goliath,” the trading app Robinhood (ironically named for someone that stole from the rich to give to the poor) shut all those Davids down.
Well, not all of them. Anyone that didn’t need to use the Robinhood app to trade, could still freely buy more GameStop stock.
As of January 29, 2021, Robinhood was still severely restricting trading, but also getting a lot of backlash for it. This is definitely somewhat of a watershed moment for the stock market, but only time will tell what happens next.
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