The Big Short 2.0
So in order to stay literate on the going ons of the internet I’ve had to learn about something truly horrific. The Stock Market. But as a Zoomer it’s my duty I suppose to stay current. Here’s what I’ve learned in the past 24 hours about the stock market.
Last night my phone was blowing up over the newest viral trend, bankrupting hedge funds. Now I’m as excited as the next person when I see a rich finance bro go bananas on Facebook, but before I rush to Robinhood, what is going on in the first place? Now everyone on the web is saying “buy Gamestop” or “buy AMC” but the reasoning behind this decision is not clear from the surface. Before we all decide to throw our retirements into stocks, let’s delve into the mechanics of this “meme” stock frenzy.
The start of this can all be traced back to subreddits such as the infamous r/wallstreetbets making an interesting discovery about Gamestop. They found that a ton of hedge funds had bet against the company, essentially wagering money that Gamestop would continue to decline in value. But what they didn’t take into account were the powers of a good meme. Gamers could not such a vital institution to the gaming community fall, and in peak Reddit fashion, the internet mob decided that they needed to do something about it.
All jokes aside, what these companies had done was to take out large sums of short trades against Gamestop. In a nutshell, a short trade is a way that a company can make money off of the decreasing value of another company though the process of borrowing and selling stocks of said company. In the example of Gamestop (GME), what I could do is “borrow” a share of GME from a brokerage and immediately sell that share for $80. While I technically still need to give that share back, it should be no issue since I could easily buy another share from the market back at the price I sold it for and return it. The shorting phenomena kicks in if I sit and wait to buy back. If GME continues to decline in value what I could do is wait for the price to drop to something like $40. While a stock drop in value of 50% would certainly make any CEO that owns stake in the stock shake in their boots, this would be fantastic for me. At this point I could buy back my share for $40 and return the borrowed stock to Gamestop and pocket $40 worth of profit. All this just from the underlying assumption that a company would continue to fail.
Now under the current pandemic there are no shortages of companies not doing so hot (to put it mildly) so the market is ripe for making a ton of short trades. What r/wallstreetbets realised was that many hedge funds had taken short positions on Gamestop and the perfect “stick it to the man” dream formed. By buying this stock en masse the momentum of this mass influx of traders would drive the stock price up, creating a bit of a problem if you’ve bet against this exact occurrence. Now panic ensues. In order to prevent massive losses, short sellers are now forced to sell their shares, which in turn drives the stock price up even more. According to MarketsInsider this has cost short sellers an estimated $1.6 billion at the time of writing this article with indication that losses will continue into the near future. This runaway effect is what the business calls a Short Squeeze.
This leaves all those investors in a tight bind however. How do you even compete against the might of the “mindless droves” of buyers just doing it for the memes? Well GME’s ludicrous rise to fame may be short lived as Robinhood, a commission-free stock trading app, tightens down on the circulation of trade on Gamestop and other high-rising stocks. In a blog post by the company they stated:
Some are calling foul play on this. The official account for the r/wallstreetbets moderator wrote, “Individual investors are being stripped of their ability to trade on @RobinhoodApp meanwhile hedge funds and institutional investors can continue to trade as normal. What do you call a market that removes retail investors’ ability to buy to save institutional investors’ shorts?” Others are following in these footsteps as a class action lawsuit has been filed in New York citing that the shutdown of stock tradings has caused customers of the app substantial losses due to negligence on the part of Robinhood.
Don’t think I didn’t do my small part of complaining as well. I’ll have you know I gave Robinhood a one star review today on the account that I’ve missed out on the opportunity to buy a meme stonk and get rich too. Others seem to have taken to that idea as well with Robinhood sitting at a 1.7 on the Google Play Store this morning. What does this mean for the future of Gamestop? At this point no one knows, but it’s always fun to see some rich people sweat a bit. Anyways I’ve had my fill of finance for today, it’s time to spend my stimulus check elsewhere I suppose.
