Didn't have time to catch up OR find it tough to follow? Let me break it down into a simple story:
1. GameStop is a video games retailer. Naturally, in today's online age, it's doing poorly: losses & even plans to shut down 400+ stores.
2. Last April, its stock price was at $3.25.
3. Last September, an investor put in money to increase online sales & to compete with Amazon: its stock started to rise.
4. But Wall Street believed this to be an unrealistic dream & decided to "short" the stock. Simply, "shorting" is to bet that the stock price will fall. If it doesn't, you make serious losses.
5. Now, the ~2mn members of the subreddit "WallStreetBets" started promoting the stock like crazy! Why? Just to screw the hedge funds over.
6. It gained serious momentum: these individual investors are putting as much money as they can to keep driving the stock up.
7. With very few selling their stock & quoting high prices, it's been rising uncontrollably: 1700% in January!
8. Melvin Capital, a hedge fund, has lost 30% of its $12.5bn assets. Interestingly, it was also short on Tesla last year. Such "shorters" lost $38bn on Tesla last year.
9. This entire situation is called a "short squeeze". How long it will continue & if/when will the hedge funds fold, remains to be seen!
Here's what our users had to say:
Alda Lima said "I saw this... so crazy! Apparently, they want to do the same with stocks such as AMC, Nokia, and Blackberry. Not sure how long the prices are going to remain this high because if the company wasn't doing well, prices going up aren't enough to keep them up. To be honest, I worry about this kind of thing... people have been known to take drastic measures upon suddenly losing a lot less money in the market. I worry everything nowadays turns into a game/meme/fun/trend with no regard for consequences when people's real lives and lifelong work are at stake 🤔 The fact that Elon Musk was involved and, from what I've read, kind of joking about it... I dunno. Doesn't show much seriousness on his part either. He should take into account it could be happening to him tomorrow. However, this shows how vulnerable the economy and the stock market really are. Curious and concerned about where this goes."
Karthik Sridharan said "Well said Alda :) Indeed, they have already started moving the prices of those stocks. Not sure how long the prices are going to remain this high because if the company wasn't doing well, prices going up aren't enough to keep them up. Fair point, but stock markets can sustain irrational prices for fairly long periods of time. The entire premise behind prices being at the point which the company deserves requires the pricing to be rational and humans are rarely completely rational :P. So, GameStop's performance is going to be totally irrelevant. I think it all boils down to how many people join together to "teach the hedge funds a lesson". I worry everything nowadays turns into a game/meme/fun/trend with no regard for consequences when people's real lives and lifelong work are at stake 🤔 To be fair, I think that's exactly the point that the subreddit investors are trying to make. They believe that hedge funds don't treat companies like there are actual people's lives that depend on it and instead play around with numbers like games. This is their way of getting back at them. So, while I don't want to say that I side with them, I get where they are coming from. However, this shows how vulnerable the economy and the stock market is The stock market in that sense has always been quite vulnerable. It is just that it is usually manipulated by large funds. Now, it has been a bit of democratised by apps like Robinhood that make it easier for even individual investors to show their might. What do you think?"
Hrishikesh Pardeshi said "True, I was following the updates on Twitter & Reddit and things seem to changing almost in real-time 😅 They have already started buying all the other stocks as well I think - the prices seem to have gone up. For the long-term consequence, we will have to see how it unfolds. But it seems there's a lot more drama yet to unfold."
Alda Lima said "I didn't know much about the rationale behind it but it does make sense - the funds themselves' speculative behavior has indeed ruined many people's lives, thanks for noting that. I just don't know if I think everyone (from the forums) who participated had this in mind - I got a feeling many might have joined in just for the "fun". And I agree with what you said about the irrational prices sometimes lasting a long time - I guess my point was coming from long-term thinking when it comes to investing, which is my (still very modest) profile. But to be honest, I have to admit reading that news yesterday did make me cringe about not knowing about it sooner and not joining in the fun 🤭 As for democratization of the stock market, I totally support it and I think there's no escaping this - in all areas actually. At the same time, I worry because since last year I've been seeing a lot of people joining the stock market (in Brazil the number of investors almost doubled last year) not having the slightest idea of what they're doing because of apps and influencers who've decided they are traders and who promise easy cash."
Karthik Sridharan said "Very true. I do think that people are having fun, but I do sense an underlying purpose in it and I think that's what has brought so many people to really drive the point. Haha, it is all a little bit crazy and I think it is better that you are part of the audience as you can now enjoy it without any worries :P. Hmm, well said. It is always going to be hard to balance the act of ensuring inclusion while educating all involved. I am not an expert in this but, surely seems like a really tough problem to solve. Even in India, some stocks are clearly noticeable in the amount of randomness in its pricing. Waiting patiently in the long-term was also not making much of a difference, so I eventually tapped out agreeing that it wasn't for me :P"
Sarah Smith said "Agree, Karthik. Apps such as Robinhood has gamified investing, changing the dynamics of stock trading. It has transformed investing into an online social activity making it simple and fun to wage on stocks. This event shows how volatile the market can be when more than 3m people act in a coordinated manner,"
Alda Lima said "Yeah, I think this is just the tip of the iceberg! I tried not looking at stocks' and ETFs prices - my strategy is to look at them as little as possible until it's time to invest - but I had to cheat and look 😅"
Justin said "And they say crypto is crazy 😉"
Karthik Sridharan said "hahaha"