GameStop: Stocks or Stonks?
Updated: Mar 22
Shorting a stock is basically betting on a stock you don’t own. Say you borrow a Gucci handbag from your friend and then sell it at a high price, betting that the price of that same handbag will fall at a later date. Once this fall happens, you buy it back and then return it to your friend, keeping the difference in the amount as profit. That’s shorting, and Wall Street was shorting GameStop stocks heavily - so heavily, in fact, that almost 140% of the stocks (basically, more than what actually existed) were shorted. Traders on the subreddit WallStreetBets saw this - and recognized it as a way of making a profit off the stock and causing the large hedge funds who had massive stakes in the stock to tumble down. They did this by hedging traders, small-time investors in the subreddit, to buy small amounts of the poorly performing stock. On around the 8th of January, the stock was valued at 18$. A few days later, it doubled and kept doubling until it hit 347.51$ almost a week after. This was caused by the investors buying small amounts of the stock. The trade started when a few months ago, GameStop announced the joining of a new member, Ryan Cohen (co-founder of Chewy) to its board. The famous businessman was making GameStop’s chances look better, which made the large hedge funds nervous, causing traders to double down on their bets on the company’s failure.
Traders on the subreddit saw this as an opportunity for poetic justice - for all the times ‘they’ had caused recessions for steep profits, for their unending greed, for the crisis’ ‘they’ put millions of American families in. It worked, and it worked better than even they thought it could. Not only did GameStop stocks rise by almost 1,600% causing all the major hedge fund firms to lose billions of dollars (even making a few investors on their boards lose their jobs), but other heavily shorted stocks such as Blackberry also made a complete turn, with the S&P 500 companies taking a 2.6% slide. Basically, not only did GameStop go astonishingly high but so did other falling stocks which were falling mostly due to the billions invested in the bets that they would fall. It didn’t even matter that under pressure from Wall Street, most trading platforms stopped the purchase option for GameStop and only allowed its sale. The people, as they say, got their revenge, and got it good.
Where do we go from here? In my humble opinion, this was not a ‘reckless incident’ as some media outlets are branding it, but well-served justice that the investment banks need more of. The GameStop drama has given small investors the confidence they need - sure, this does not mean we’ll be dismantling billion-dollar empires made off of bailouts using hard-payed taxes anytime soon, but it’s something, and hopefully, the current congressional hearing on GameStop will end badly for the hedge funds (doesn’t look like it, but I can pray) and small investors will continue to hold more power and say in their hard-earned investments.
- Rudri Mehta