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THE GAMESTOP SAGA 2021
Read more on - Polity | Economy | Schemes | S&T | Environment
- A new war: The war between some retail investors and Wall Street giants has played out in full public glare, in the GameStop stock.
- What is this firm: GameStop is an old, beleaguered video games retailer notorious for giving gamers pennies on the dollar for their used software. In the times of online games, their fortunes are dwindling.
- The price: GameStop’s share price, which closed on 26 Jan, 2021 at $147.98 (it then went over $300) isn’t any reflection of its health or value as a company. It’s a reflection of a war between “retail investors” (individual day traders, or regular people) and institutional investors (big Wall Street firms).
- Totally insane: What is happening is not normal, it's insane. Till end January 2021, at least one hedgefund had gone bankrupt, thanks to a group of average investors on a Reddit group. Many more may go bankrupt soon. So let us understand trading stocks.
- Trading in stocks: It is simple. When they go up in value, you make money, because it's worth more than you bought it for. When they go down, you lose money.
- But "Short selling" is the opposite. Short selling makes money when the stock goes down in value. You sell shares (that you don't own but borrow) in the hope of buying them later at lower prices. Profit is the price differential.
- So, if A borrows B shares in GME, and sells them for $10, he pays B $1 to do this, and promises to give all of B's shares back. Then, if the stock goes down to $5, A buys the shares back at a cheaper price.
- So A's profit is $10 - $5 - $1 = $4.
- Hedge fund’s greed: Now what happened in the GameStop stock was that a particular hedge fund tried to force down the price of GameStop, and short the stock. It usually works fine. It's been done thousands of times, with no problems. So they shorted GameStop (GME) from $20, to $10, to $4. Their greed kept compounding. They kept doing it again, and again, for months. Making billions of dollars, and almost bankrupting this company. (shares and share price are used as collateral for loans and access to capital).
- Enter Reddit: Now comes Wallstreetbets - a trading/investing subreddit. Someone noted that these hedgefunds shorted 140% of all shares available. These hedgefunds were so greedy, they borrowed more shares than actually existed. They borrowed 140% of all the available shares. It was literally impossible for them to buy them all back. So someone on Wallstreetbets realized this, and told everyone else in the group. Now, the rule with short selling is that all those shares that they borrow, must be paid back.
- Trading in stocks: Realizing that these hedgefunds shorted GME by a ridiculous amount, these Redditors (normal people like you and me) bought every share they could get their hands on. Driving the price up like crazy.
- Why? Because these hedgefunds eventually (within a few months) HAD to buy all those shares back, at whatever price they could get them. They didn't have a choice.
- Example: So for example, if they borrow 10 million shares, and sold them for $10, they made $100 million in immediate profit. But eventually, they HAD TO buy those million shares back. They didn't have a choice. That was the deal they made when they borrowed the shares.
- Game on: So these Redditors bought the shares, driving the price up, forcing these hedgefunds to buy back at crazy prices. The hedgefund sold and made $100 million, but now they had to spend $1.4798 billion getting those same shares back. A loss of $1.3798 billion.
- Due date: So eventually, the due date for when these hedgefunds need to return the borrowed shares comes closer. And what do they do? They double down. They short MORE. Because they're sure that they can manipulate the stock enough to get it to crash, thereby saving themselves.
- Can’t crash it at all: Fast-forward a few days, every attempt to crash the stock fails. Everyone knows what they're trying to do, so people keep buying the stock. And with every additional bit of media attention, more and more people are buying the stock, destroying the greedy hedgefund in the process
- Bail me out: Eventually Melvin Capital, a multi billion dollar hedge fund, needs a bailout, because it has lost so much money shorting GME. They borrowed billions off another hedgefund. That was when the stock price was $76. Then the stock ended up at $147.98 for every share. Up from $4.
- Crying: These hedgefunds were STILL shorting the stock, at 130% of available shares. So now Hedgefunds are crying on every platform they can get their hands on. They want the government to stop trading. They want this reddit forum investigated and banned. They're screaming 'market manipulation’.
- Spouting whale draws the harpoon: While these hedgefunds are on every news channel screaming about Reddit and Wallstreetbets, they inevitably draw attention to themselves, and what's going on.
- Real Whales are here: So now enter the 'whales' - individual investors who can make a splash and impact the stock. These are millionaires and billionaires that have a bone to pick with hedgefunds and short sellers. (whether you like these people or not is irrelevant, they're part of this story regardless)
- Elon Musk enters the ring: Elon Musk hates short sellers, because they tried to cripple Tesla so often. With a single tweet, Elon sent the share price skyrocketing from $147.98 to $230. And along with Elon Musk, a huge number of wealthy 'whales' have started to jump in. Buying up HUGE amounts of stock.
- Let is happen: But these investors don't care. They don't care how expensive they buy the stock for. Because they KNOW these hedgefunds MUST buy the shares back. For many of them, they don't actually care if they lose money. They just want to watch these hedgefunds burn.
- So what happens next: No one actually knows. As time goes on, and as hedgefunds fight to buy back as many shares as possible (driving up the prices more on each other), their bill will eventually be due, and they will have to return the borrowed shares. Some hedgefunds may go bankrupt. But it's not guaranteed.
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