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GameStop, Wall Street? What is actually happening?

mareksamec
System admin, support, linux enthusiast and a hobby historian 😄
Updated on ・3 min read

NOTE: This article was originally written for an uneducated audience without deep knowledge of internet, social networks and markets.

What is all the fuss about GameSpot? What is happening on Wall Street? 💰

To put it shortly a big group of amateur traders connecting on a web forum/social platform called Reddit joined up and crushed plans o few big investors. These investors wanted to make money on GameStop and other companies whose value is dropping.

Making money when the stock value is increasing over time can be easier to imagine. You buy stocks (like Tesla, Facebook, etc.) and you hope, that over time, the stock value increases as the company's value rises. That is if the company is successful or when the public has such an impression🤑. If this happens, you can sell the stock a few years later and keep the difference as a profit. But how can investors make money, when a company's stock value is actually decreasing?

The answer is "short selling". Short selling or "shorting" is an advanced trading technique. Is it something sketchy or immoral? Most likely not, let me explain. You can buy stocks, but you can also borrow them in the same way as you borrow money, cars, or other things. When you return the stock, you have to pay some fee for borrowing it. Now how can you use this to make money?

Let's say you borrow 10 stocks of Tesla when each stock costs $1000. In total, you would have $10000 worth of Tesla stocks. Now when you borrow stocks, you usually don't need to return the same stocks you bought. You can for instance buy 10 stocks from other sellers and then return these to the lender to replace the 10 stocks you have originally borrowed.

When you borrow 10$ from your friend and spend it, you can go to work and earn a new $10 and return them to your friend.

It goes the same with stocks. If the stocks are traded publicly they are usually mutually interchangeable. So what you can do, is borrow 10 stocks of Tesla and sell them immediately. You will earn $10000 and you will pay some fee to the person who lent you the Tesla stocks the same way you pay interest to the bank when you borrow money. Let's say the stock price indeed decreases over time and one Tesla stock is now worth $900. You will buy 10 shares of Tesla, which will now be worth $9000. Now you will return these 10 shares of Tesla to the lender. Do you see? You have borrowed 10 shares, and a few months later you have returned the 10 shares back. But because you have sold these shares for $10000 right after borrowing them, you now have $1000 extra. Of course, you will have to pay some interest for borrowing the shares, let's say that might be $200. That's quite high, but you still have an $800 profit which is nice!

So where is the catch? This strategy is very risky ⚠:

⚡ Let's say you borrow 10 stocks, sell them immediately but in 3 months, Elon Musk manages to increase the value of one stock from $1000 to $2000 by a single post on his Twitter 😁😎. You will then have to pay $20000 to buy the 10 stocks. You will lose $10000!
⚡ If you buy stock and you speculate that the value will increase over time, you can only lose what you invested. But with short selling, your loss is not limited because theoretically, the stock value can grow infinitely!

❓ Now to answer the original question:
In many cases, investors put money to hedge funds that utilize short selling and other advanced trading techniques to generate profit over time. This is simply another way to invest money. Some hedge funds bought a lot of GameSpot stocks. Traders on Reddit saw that big players are speculating on the value decrease so they decided to troll them a bit by overbuying the stock. When there is a demand the stock value increases. This threw a big wrench to the hedge funds strategy and caused a massive loss. Why was this possible? Thanks to innovations and internet availability, stock trading is now available to anyone with a smartphone and a trading app like Robinhood or eToro. You don't need to go to the bank or a broker to start a trading account. You also don't need to pay the trading fees that discouraged many small traders in the past. To put it simply, the game has changed 😎.

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