When you think of the stock market, you probably think of wealthy people who trade stocks for a living. This week though, is different. Many hedge fund managers felt Game Stop’s stock would lose value. Many hedge fund managers were using a put option, or short selling, on the company’s stock. Users on Reddit saw this and had an idea. They decided to invest in Game Stop shares, not because of the company’s fundamentals, but by driving the price up…creating value through supply and demand.
So what is short selling? Short selling is when you have a buyer and a seller. Lets say person A is a buyer and person B is the seller. Lets say on January 1st the price for a share of company ‘blank’ is 100 dollars. Person A thinks that in one month the price of company ‘blank’s’ share’s will be worth 125 dollars. Person B thinks it will be worth 75 dollars. So they agree that in one month no matter what, person B will sell the stock to person A for 100 dollars. So if the price of the stock goes up, Person A makes money (in this case, 25 dollars), but if it goes down Person B makes 25 dollars. Well many hedge fund managers decided to bet that Game Stop shares would lose value. Some Reddit users saw this and decided to get together and invest in Game Stop . They did not do this based on the fundamentals, but over the fact that if the big investors bet it would go down they could create supply and demand. Therefore, making money while big investors would lose money.
An interesting thing was that once Wall Street saw what Reddit users were doing, some apps people use for trading stocks, such as Robin Hood, stopped letting their users trade Game Stop through their app. Is this an example of the power big tech has? Is Robin Hood just protecting the wealthy? Well, many people were very upset at Robin Hood, so people started a class action law suit against the company.
Robin Hood was not the only stock trading app to block the trading of Game Stop stock. Webbull did as well, though they later rescinded that ban. I am curios to see how Biden’s presidency’s responds. Will the administration back Wall Street or Main Street? Or will they stay out of it all together and leave it to the Security Exchange Commission(SEC) to handle?
What do you think about the Game Stop controversy? Be sure to comment with your thoughts!