What a week, right? Stonks drama all over the place. Even Elon Musk tweeted about it.
As an econ major, I always get fascinated by how much things happening in the online world affect the real economy. And of course, the craze around the GameStop stock had me flipping out.
Reddit geeks beating big boys from Wall Street? Well, that’s something you don’t see every day.
Stock trading- what is it all about?
Okay. Let’s start from scratch.
Stock represents partial ownership of a company. Companies issue stock to attract investors. When you buy stock in a company, you invest money. If the company makes a profit, you get a dividend.
The main idea of the stock market is straightforward. When the stock price is low, you buy it and then sell it once it goes up. Buy low, sell high, if you will.
The difference between the money you invested and the money you earned from selling is your profit. That’s how you make money.
Regular people, like you and me, can’t walk into a company (or email them, we’re still in the pandemic) and ask them: “Sir, I’d like to buy some of your stocks. That’s not how it works.
You’ll need a stockbroker. A broker is a person or a company whose job is to buy or sell stocks on your behalf. The simplest way is to choose an online stockbroker.
Now come the hedge funds. Think of it as an alternative way to invest money. They gather money from other investors and use different investment strategies to earn a profit for those said investors. They are private partnerships, usually made up of a small number of wealthy investors.
What Went Down With GameStop?
In the GameStop case, hedge funds used one risky technique called short selling.
Let’s say I have a company that is not doing so great. The stock price keeps going down and down. You might think: Well, look at her. Her business is going to fail.
Expecting a decline in the stock price, you decide to bet against my company. To do short selling, you borrow the stock from somebody at one given price and then sell it at a higher price.
Imagine a guy named John is one of the shareholders of my company. You borrow the stock from him and sell it to Lisa. Then you wait for the stock to plummet so you can buy it at a lower price. After you buy it from Lisa, you sell it back to John. Keep in mind, when it comes to shorting a stock, the borrowed stock must be returned.
To cut it short, if the price goes down, you make money. That’s what the hedge funds were hoping would happen. In reality, something else happened.
GameStop, a video-game retailer, has been losing millions for years. More and more people buy games online and don’t go to physical stores anymore. Needless to say, the pandemic stirred up some problems too.
Now we come to the people considered to be the real heroes of the story: WallStreetBets. The now-famous subreddit community, whose amateur investors discovered what was going on with GameStop’s stock. They came up with a plan. Plan to give the wealthy Wall Street elite a taste of their own medicine.
Thousands and thousands of Reddit users went on to buy GameStop’s stocks, and of course, the stock price took off. As the prize was going up, the finance bros started freaking out, desperately trying to cut their losses. That made the price go even higher, and well, hedge funds lost a lot of money.
What Were Redditors Trying To Do?
Irrational. Weird. They’re only good at memes. That’s how outsiders see the Reddit community. “Dumb money” (how daily traders are often called by Wall Street people) made some money. The funny thing is, some of them even for the first time.
What was the point of saving a company that the system was anticipating to go bankrupt? The real question should be why such a system allows the rich to get even richer. Sadly, at the expense of the common folk. A quick reminder: the 10 richest men on the planet could stop the coronavirus with the money they made during the pandemic.
The economy’s trade-off goes something like this: do we sacrifice equality for efficiency, or do we get more efficiency but less equality. I guess you can make your conclusion on what kind of world we live in today. The Reddit rebels realized how the big FinTech companies operate. And they got sick of it.
Most of them say it was never about the money. It’s so much more than that. It’s a sign of a generation questioning a system that is unfair and flawed.
They get to keep the satisfaction that, at some point in their lives, they’ve caused severe headaches to some filthy rich fund managers.
And they did it collectively. If you ask me, that’s kind of impressive.
How Will the GameStop Thing Unfold?
Most Redditors agree not to sell their stocks right now. But the price can’t go through the ceiling. At some point, it’s going to go back down. When? No one knows exactly, but the market always finds a way to balance itself out again.
It’s going to be exciting to see how the GameStop story gets wrapped up. Maybe it will become one of those short-lived stock manias that get turned into a meme. Maybe it has the potential to spiral into a new economic movement inspired by Reddit geeks.
Time will tell.
Cover image: by Lorenzo Cafaro from Pixabay
