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Stock Frenzy What is happening with GameStop?

THE BASICS

Short Squeeze

What is it?

Before we can get into what happened with GameStop, you first must understand a few basic things. Users on Reddit in the subreddit known as r/wallstreetbets performed what is called a short squeeze.

When someone (a hedge fund in this situation) shorts a stock, it means that they are selling what shares they have on hand at a high price to then buy back at a lower price, pocketing the profit.

Stock trading is always risky, but shorting is one of the riskiest things you can do. Although, just like everything else with investing, the bigger the risk, the bigger the possible reward.

What is a Short Squeeze?

A short squeeze is when a company (or just a bunch of people) start to buy up all the shares that other companies are shorting, making the price of the stock skyrocket. Because of this, the company that was shorting has to buy back as many shares as possible to minimize their losses, but the damage is already done.

GAMESTOP

GameStop Stock Rise

When these hedge funds (Citadel Capital and Melvin Capital are the main ones) wanted to start shorting GameStop and others, people realized that those companies weren't doing so bad. Instead of owning the stock, it was already pretty low, so they bet it would go down in a certain amount of time instead of actually shorting.

While the hedge funds were "shorting" the stocks, causing them to fall, others were buying, causing it to stay the same. The hedge funds got worried, so they made more bets that the stocks would go down in a certain amount of time. They made so many bets that they promised to buy more shares in GameStop than there were shares in GameStop. This is where the fun happens.

Reddit users realized this, and started to buy more GameStop. Because the bet has a due date, the hedge funds have to buy the stock at whatever the price is when the contract is over. That means they have to buy it from the people who own at whatever price it is, as long as it doesn't get to the price the hedge funds bet it would. GameStop skyrockets, and everybody sees this and many more get in on it.

GameStop (stock ticker: $GME) went from a price of $30 per share on January 12th to $483 just 2 weeks later. This is an increase of 1510%! The hedge funds lost billions of dollars, and those who already cashed in earned millions.

Similar Situations

That isn't all. AMC Entertainment ($AMC), Nokia ($NOK), BlackBerry ($BB), and many other stocks were also being shorted, so those shot up too. Not as high as GameStop, but AMC had a 769% increase, Nokia had a 107% increase, and BlackBerrry had an 87% increase.

Those who go onto r/wallstreetbets see screenshots of some users getting up to 8 figure earnings (that's over $10 million). Many others are still holding their positions. But it doesn't end there.

ROBINHOOD

Robinhood Stops Trading GME

You may have heard the term "market manipulation" a few times. It is a crime when a company or group of people interfere with the stock market, by creating false appearances, purposefully driving the stock up or down, or many other ways.

Robinhood is an app that allows its users to freely trade stocks, as long as they're 18 years or older. Many people use it, including most of the r/wallstreetbets members. On it, you can trade almost any stock, as long as its a public company.

Robinhood acts as a brokerage, so there is no middleman for its users. As soon as they want to buy, there's no need for an order in the future, you can buy and sell in real time. They make half of their money with something called "payment for order flow".

Payment for order flow is when a brokerage pays Robinhood so that they can be a middleman between Robinhood and the market. This allows them to see Robinhood's order data before anyone else. 65% of Robinhood's payment for order flow orders are from Citadel Capital. This means Citadel is responsible for over 25% of Robinhood's profits.

When Robinhood stopped allowing users to trade GME and AMC, it rose suspicions of a conflict of interest and market manipulation. If most GME holders use Robinhood, and Robinhood stops allowing GME trades, the price of the stock is bound to go down.

Robinhood automatically sold the shares of some users, and when they attempted to cancel the sale, they received the error message pictured on the left.

Effect

Because of this, many people stopped using Robinhood and switched to apps like Fidelity and Schwab. Users also review-bombed the app, plummeting the rating to a 1.1 star on Google Play. Google then removed all the new reviews, pulling the rating back up to over 3 stars.

REASON FOR BACKLASH

Reasoning and Fallout

In the housing crisis of 2008, families lost hundreds of thousands of dollars, their homes, their cars. They struggled to pay for food, and many fell into addictions like alcoholism and drug abuse. This was because hedge funds got too greedy. Families were affected and were forever changed.

Many of the reddit users who wanted to "screw over wall street" used the 2008 financial crisis as reasoning. They saw it as a way to get back at them for not being careful with the economy. When you don't play by the rules, you get punished.

There are multiple lawsuits against Robinhood for their halting of trading of certain stocks. Robinhood and other brokerages have since resumed trading of these stocks, but not without consequence. They have lost millions of users and millions of dollars of future revenue.

People made millions of dollars, and the hedge funds lost billions. While the hedge funds are trying to paint the people as bad, they are showing they are the opposite. A man donated Nintendo Switches to a children's hospital. Another paid for a stranger's surgery.

Video Breakdown

Please remember to do your research if you are thinking of investing!