If you're still trying to catch the drift, Here it is: Wall Street witnessed a rebellion of amateur investors who caused rich people to lose shit tons of money, want to know how? keep reading!
You maybe wondering what is GameStop? GameStop is the world's largest retail gaming company. Think Blockbuster but for video-games. Thanks to the digititalization of video games, compounded by the pandemic,
GameStop was struggling in the past year. Their physical shops - the
basis of their business - weren't doing well. Institutional investors, including the $13bn hedge fund Melvin Capital saw an opportunity to make profit from betting against GameStop's share price, or short selling.
You might be trying to figure out what is shorting/short-seller is, don't worry, I've got you!
Shorting is a way of making profits when the price of an asset, stock/shares falls. This method can increase volatility and reduce stability. In a nutshell, A short seller pays a small fee to borrow shares from someone else. Usually this is an institutional investor such as a pension fund. The short seller then sells the shares at the market rate.
Later on, they buy the shares back again and return them to their owner. If the price has fallen the short-seller pockets the difference between the price they sold the shares at and the price they bought them back at. If it has risen they lose money.This is what happened when wealthy people shorted GameStop shares, predicting their value would decrease, but it actually increased.
This event has shown why short-selling can be both immensely profitable and enormously risky. GameStop’s's shares hit a low of $2.57 last year before rising to $18.84 by 31 December after a notable hedge fund decided to back the company.
The price rose steadily but other funds were betting against GameStop by short-selling large numbers of shares.
At this point, the amateur investors of WallStreetBets entered the fray. Several Reddit users called for people to pile into GameStop shares, pushing up the price to put pressure on the short-sellers - a process known as a short squeeze.
Many Reddit posts suggested that this was a way to punish hedge funds that were seeking to profit from a company’s troubles. Other users were apparently more interested in making money as GameStop’s share price soared. Some funds got involved too, hoping to profit from the momentum as the price rose rapidly.
What has Robinhood got to do with all of this?
The app is targeted to younger people and specializes in low-cost trading - the perfect platform for amateur investors.
But on Friday, Robinhood suddenly banned users from buying GameStop shares. This manipulation of the market infuriated its users, because people saw it as Robinhood trying to protect the hedge funds which created an uproar from the people. Robinhood customers weren’t happy with the restrictions. A group of individual investors filed a class-action complaint against the company, alleging it “deprived their customers of the ability to use their service” as well as potential gains from trading for “no legitimate reason.”Robinhood has since lifted their restrictions, allowing amateur investors to invest in GameStop again.
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