What’s happening with GME/GameStop?

For those of you confused about what’s going on with GME/GameStop stock: there are two ways to make money with stocks. You can “buy low, sell high” OR you can “sell high, buy low” depending on which direction you think things may go. Going “long” means you think the price will go up in the long run. Going “short” means you think it will go down in the short term.

Some redditors on the WallStreetBets community discovered that a hedge fund was heavily shorting GME. The hedge fund essentially received money from a brokerage for selling GME at a certain price – let’s say $20/share – with the expectation they would buy it back for less (say $5/share) to pay off their debt with the brokerage and pocket the difference. This created the conditions necessary to perform a market manipulation strategy called a “short squeeze” and it’s typically only done by institutions because of the money/knowledge required.

So what happens is a critical mass starts on WSB develops where they realize they can “stick it to the fund” by forcing the hedge fund to pay a higher price for the stock.

The price started going up due to how many people wanted to buy it (supply & demand). This meant that the hedge fund would need to start buying the stock back to prevent unlimited loss. Remember – if they sold it at $20/share, and the price is suddenly $300/share, they’ve lost $280/share. The higher the price, the bigger the loss.

But trying to close out their position to limit their losses also adds to the buying pressure, further driving up the stock price.

The fact that a bunch of individual traders have managed to pull it off is why the hedge funds feel so threatened. Further surprising is that Robinhood discriminated against individual traders by placing limits on their ability to trade (to “protect” traders from making “the wrong” decisions).

Our capitalist system is already massively tilted in favor of corporations & financial institutions – Robinhood came on the scene advertising itself as making trading & investing more accessible to the masses. Risk is an inherent part of any financial management plan, and has always been left to the individual to determine for themselves. Robinhood’s actions set a precedent that institutions get to dictate who can/can’t buy & sell.

All of this is to say:

If new regulations come down against individual traders being able to participate in the market, it’s going to drive wealth disparities unimaginably wider. That’s why all of this is such a big deal.