2021 has started with an eventful January. All of us have been closely observing the stock market as a Redditor group, making income perhaps in the most unexpected way possible. They bonded with each other to profit and contorted up the Wall Street hedge fund in a spectacular way. The Game Stop stock from a 52 week low of US$2.57 went to a 52-week high to US$483, is currently trading to US$67.75 as of February 4, 2021, at 11:30 EST.
Where did this all begin? To understand the story in its full context, we need to understand the concept of “Shorting” the stock. Shorting the stock can be explained with an easy example. Let us say that we have ten cookies priced at $1 each. Alex borrows these ten cookies and promises to give them back tomorrow.
Alex sells all the cookies he borrowed and gets $10. The next day, cookies went for sales for 50%. Alex buys ten cookies and gives them back, making $5 in profit; this is “shorting.” Shorting does come with a risk though, if the price of whatever you are trying to “short” increases, then you stand to lose money.
Imagine Alex tries to do the same thing with the same ten cookies tomorrow; however, some friends notice that he has been shorting cookies. Now, a new friend decides to buy all the cookies in the market. After selling ten cookies for $10, there are no more cookies on the market to buy except this from this new friend. This new cookies owner can now charge Alex whatever they want because they have a monopoly on cookies now. Alex would have to buy to pay back ten cookies at whatever price they demand. This maneuver is called a “Squeeze.”
Now replace cookies with company stock, Alex with a Wall Street hedge fund, and a new friend with the fellow at r/WallStreetBet.
As per my understanding Melvin Capital, a major Wall Street hedge fund, has been shorting Game Stop stock or GME for a while, betting against the dwindling retailer hoping to make even more money in their destructive path. The best case in shorting a stock is for a company to go bankrupt. When that happens, you will not even have to pay back the stock that you borrowed and get to keep all of what you sell them for. One Redditor under the name u/DeepF**kingValue saw this coming and proceed to notify the 2.5 million Redditor in the subreddit r/WallStreetBet of this opportunity.
WallStreetBet or WSB is a knowledgeable group of investors, pulling millions of dollars in profits one day and losing millions of dollars on another. It is no doubt that WSB is a turbulent community that usually trade only for YOLO(you only live once) investor looking to go big or go home. It is no doubt that Redditors on WSB saw this as a perfect opportunity to gain a considerable profit. On January 25, 2021, almost half of the stock mentioned on the subreddit was GME. Then, all hell broke, as Redditor bought more and more GME stock, investors who had earlier shortened the stock now had to buy more GME shares to cover their short positions. In turn, this made the stock rose to a new unimaginable value.
The moment the hedge fund realized the situation they had gotten themselves in. The experts started claiming that the entire story is a noticeable Market manipulation stating GME stock is in no way worth over a hundred dollars. These Reddit investors do not know what they are doing. However, the Wall Street hedge funds who lost millions overnight due to this, are the principal in point for market manipulation.
From using various news channels to condemn these Redditor as Neo-Nazis, blocking the stock entirely from private investors. The trusted Robinhood app has recently been the breeding ground for this fantastic event, bent under the immense Wall Street pressure. Not coincidentally, significant hedge funds are also the major buyer of their user data and suffered a significant loss from this entire incident.
Until now, the diamond hand Redditor is still holding the stock without any intention of selling, in their word “I simply like this stock.” To the folk still holding the stock, it is now more than just a chance to make money. It is a massive wake-up call to those at Wall Street hedge fund conglomerate who treat the financial systems as their casino, hoping to get bailed out if they get too greedy and mess up. Salute to u/DeepF**kingValue, the guy who started it all.
Like I mentioned at the start of the story the stock as of February 4, 2021 is at US$67, so all good things do come to an end. What goes up, does come down slowly but surely. My advice is to always understand the industry and a company’s fundamentals before investing.