Recently within financial media, the Reddit group ‘R/WallStreetBets’, and some other subreddits, have been creating lots of commotion surrounding their stock investments, and the effect of those investments, on the billionaire hedge fund managers responsible for short selling a number of companies. A large following of small (what’s known as ‘retail’) investors have taken Wall Street by storm, as they purchase and hold the shares of several companies, the most notable being Gamestop, with the intention of raising the stock value as a way to retaliate against Hedge Funds.
How did this start?
The Gamestop situation is an ongoing process, lasting longer than you may think, with people investing in shares as far back as last August when they were valued at $4.43, and why this started has everything to do with what the Hedge funds were up to.
When the Coronavirus pandemic swept its way across the globe, gamestop stores across the US were forced to close and in doing so, began to lose a significant amount of money. To profit from the company’s hardship, hedge funds decided to ‘short sell’ Gamestop shares.
‘Short-selling’ is best explained by a site known as ‘Investopedia’ which states “Short selling is a fairly simple concept—an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender.
Short sellers are betting that the stock they sell will drop in price. If the stock does drop after selling, the short seller buys it back at a lower price and returns it to the lender. The difference between the sell price and the buy price is the profit.”
When redditors caught on, they decided to take action by investing in the stocks en masse, causing the stock value to increase, meaning the hedge funds would have to buy the stock at a higher value to return it to the lender and in doing so, would lose incredible sums of money. However this goes further than Gamestop, other shorted stocks include AMC Entertainment, Nokia, Blackberry and Bed Bath and Beyond. However Gamestop alone saw its stocks increase within 27 days from $18.84 to a phenomenal $347.51.
What’s happening now?
After the stock value skyrocketed, Short-Sellers saw a staggering loss of $13 Billion in Gamestop alone, causing mass uproar followed by speculation of fraud and market manipulation caused by redditors making ‘organised investments’. Proving that when it comes to wall street, it’s only a free market until the little guys start making the money. The hedge fund ‘Melvin Capital’ received a billion dollar bailout as they neared bankruptcy and have since withdrawn entirely from their shorting position on GME stocks.
Amid the hedge fund losses many financial exchange companies, most notably ‘RobinHood’, placed restrictions on the purchases of Gamestop and AMC shares, creating a substantial dip in the stock value as many retail investors were suddenly unable to buy. RobinHood have since eased their restrictions, so that instead of only being permitted to purchase 1 GME or AMC share, investors are now allowed up to 500 shares of GME and 5,500 shares of AMC, meanwhile other trading companies have maintained full restrictions or limited purchases. There is suspicion among redditors about whether these restrictions were put into place by Robinhood to ‘buy time’ as Hedge Funds attempted to make up for the significant losses. This came after news that Robinhood makes most of its income by selling its information to investors, who use the data to coordinate their own trades, one of the main customers being ‘Citadel’ who were responsible for the aforementioned $2.75 billion bailout on Melvin Capital who, until recently, had a short position on Gamestop.
Robinhood’s restrictions were not the only part of this immense story to arouse suspicion. Within the past two weeks there has been a mass influx of financial posts pushing for retailers to invest in specific silver stock (SLV), which has been tied to Citadel, arousing suspicion of a ploy to regain Gamestop losses, although this has not been proven, silver ‘propaganda’ disappeared from financial media as soon as the Redditors of r/Wallstreetbets denied any involvement. The ‘Securities and Exchange Commission’ (SEC) have also begun investigations into R/Wallstreetbets, to find out if there has in fact been any sign of fraud or organised betting, however, no proof has been found thus far.
With such impacts on hedge funds, the immense number of restrictions on investing and a rich plethora of conspiracy theories surrounding corruption and propaganda, this story is certainly an interesting one, and perhaps soon we will find out if Redditors will in fact succeed in skyrocketing Gamestop ‘to the moon’.
By Morgan Barnett