What the heck is goin on? If we had to sum up the recent stock market madness. You know, GameStop. Could we? Let’s try. This group of amateur investors saw an opportunity to make a lot of money if they all invested in GameStop, at the expense of a hedge fund that was betting GameStop’s stock would go down . . . and now, billions of dollars later, hedge funds are crying to Congress to change the laws so they keep their power on Wall Street.
There’s a stock term called “shorting.” That’s where you’re predicting the price of a stock will go down, instead of up. If it does, you get to pocket the difference. So if you short a stock when it’s $10 and get out when it’s $7, you make $3. BUT . . . if you short a stock and it goes up, you have to cover the difference. So if that $10 stock goes to $15 and you decide you can’t wait for it to potentially go down again, you need to buy the stock back and cover the $5.
There’s a group on there called Wall Street Bets, where amateur investors share stock tips and talk about their day trading successes and failures. And they usually do it through lots of memes and emojis. A few weeks ago, someone on Reddit noticed a hedge fund called Melvin Capital had taken a HUGE short position on the video game store chain GameStop. But there were some indications that GameStop WASN’T in that bad of shape.
So . . . the group on Wall Street Bets all decided to buy GameStop stock, driving the price up, and really screwing over that hedge fund that had shorted it. Because now, the hedge fund would have to cover the difference. And it was QUITE a difference. As this GameStop thing really got a lot of momentum and the stock price skyrocketed, the hedge fund wound up losing more than $13.1 BILLION on their short position . . . which was more than their fund was worth.
Oops. Some very serious professional investors and hedge funds were REALLY upset that a group of random people on the Internet managed to make THAT big of an impact on the market. One billionaire hedge fund owner had an interview on CNBC where he called it a, quote, “way of attacking wealthy people and I think it’s inappropriate.”
And that’s not all. The Wall Street Bets group started buying OTHER stock that the hedge funds were shorting, like AMC Theaters and Nokia, and several apps like the popular trading app Robinhood BANNED them from buying those stocks. Stay tuned. Wall Street has always been Vegas Baby!
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