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  • Jonathan Shiek

How Redditors Crashed WallStreet With GameStop

With the recent buzz around GameStop and the confusion about stock market terminology, many people are trying to make sense of what it’s all about. If you are one of those people, we break it down here for you in simple, layman’s terms. 

The story begins with GameStop’s suffering business. Once flourishing in malls as a video game retailer, the changing market and the pandemic brought GameStop’s successful years to a halt with 1,000 stores projected to close by the end of March 2021.

Noticing the potential to earn from the retailer’s downfall, investment companies like Citron Research and Melvin Capital, have been betting against GameStop’s shares, using a trading technique called short selling. 

A share shorted is a share borrowed from a broker and then sold in the stock market. In this scenario, the short sale investors borrow GameStop’s share worth $40 from a broker and sell it for $40 immediately, getting $40 in cash per share. They wait for the bad news to cause panic to sell, hoping the share crashes to say, $20. Then, they buy the share back for $20 and give the share back to the lender while keeping the $20 difference.

However, this was not the case for GameStop’s short sellers. Many investment companies were so confident about GameStop’s shares impending doom and plunge in price, that they banded together and took the huge risk of shorting these shares.

Catching wind of this a few weeks ago, a Redditor on Reddit’s r/WallStreetBets (WSB) began convincing everyone on the online community’s thread, to buy as much of GameStop’s shares as possible. This made the share price shoot up to over $480 at one point.

Now investment companies owe shares to their lenders, but since they bought GameStop shares at $40 and sold them at $40, they have to buy them back at over $200. This resulted in massive losses. 

As a result, they panicked and were forced to buy back the shares they shorted. This was to prevent even greater losses, which only caused the share price to rise higher. The scenario resulted in a market phenomenon known as a short squeeze. 

To date, this squeeze has cost investment companies billions of dollars. And while Wall Street comments on the illegality of the matter, r/WallStreetBets members and many others who joined in, did so in an attempt to beat institutional investors, who are used to throwing their weight around and pulling the lever on the economy.

The spotlight now shines on the way Wall Street operates. It highlights a message calling for regulators to re-examine the system in which giant corporations always benefit, while the ordinary investors struggle to make a profit.

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