The GameStop fiasco took the world by storm by soaring at 1625% since the start of the year. It is a changing point in the dynamics of the stock market and will be etched in world history. It is a great example of how the rich capitalise on the stock market and dictate it as they see fit, and how the stock market is in need of regulation.
To understand what went down, we need to first understand what shorting is. Say I borrowed a candy from my friend, A and sold it to another friend B. Now I am hoping that the price of the candy goes down so I can buy the same candy again and return it to A, and therefore make a net profit. But then I go to stores and see that the candy is sold out everywhere. A is angry because he wants his candy back. So, I have to import the same candy and pay a much much higher price, resulting in a loss. This process is called shorting, and the candy is a ‘short’.
Now, for GameStop, a reddit user on r/wallstreetbets noticed that a hedge fund had bought a lot of short shares for GameStop. He convinced other redditors with YOLO savings to invest and buy as many GameStop shares as possible to treble the stock market. It was a success because people bought GameStop shares in extremely huge amounts, making the price of each share extremely higher, therefore making the hedge fund lose billions and billions of dollars- even more than what it was worth. On December 9, the day after the shorting started, GameStop stocks rose by 20%, closing at $13.66 per share. On January 13th, the stock closed at $31.4 a share, surging at more than 50%. Citron Research and Melvin capital- two companies with the most short shares in GameStop were forced to close their positions.
Major businessmen like Elon Musk also tweeted ‘GameStonk’ in favour of the stock market upsurge and the forum r/wallstreetbets. It has taken the stock market world by storm, and has been trending on twitter and reddit alike. It has caught the interest of traders and non-traders owing to its extremely fascinating saga, and sets a milestone of how a bunch of mere reddit users could succeed in bringing the richest people and the most major hedge funds down to their knees. Melvin Capital, Citron Research, and other players who were a part of the hedge fund have been so appalled at the sequence of unfolding of events.
The entire GameStop episode just shows how unstable and fickle the stock market is. Earlier, the rich used to have an influence on how the stock market would function, and now with GameStop, a mere reddit thread did. The system needs to be regulated, which is why it is important for young investors to be extremely cautious while trading. This shows how the stock prices have absolutely nothing to do with how well a clamping is doing in the market. GameStop is a video game retailer, and is not worth much. The addition of social media, like Reddit in this case makes the stock market even more volatile. This was a clear case of manipulation- to ‘show’ the rich hedge funds that they are not the only ones who can dictate the market. If that was the sole motivation behind it, should there be laws set in place to make sure this- or something worse (like the market crashing) does not happen again? It will also make sure there is a certain degree to which a particular individual/company can control the market, which is a win-win.