Ali Hasan
What recently happened at the stock market wasn’t normal. The Wall Street was struck by a group of small investors who wanted to teach a lesson to big hedge fund companies and give a taste of their own medicine. A group on reddit decided that they will take the prices of a few companies to the next level and will disrupt the plans made by the big wealthy corporations.
They decided to buy the shares of GameStop which is a small retail company that sells video games and was worth less than $400 million in the middle of 2020 but it just became a $10 billion company in less than 6 months. Their stock price skyrocketed by almost 8,000%.
- On 26 January this year, the stock closed at $145.60,
- Then increased to $345.00 the next day,
- Peaking at $469.42 on 28 January.
- GameStop closed at $193.60 on the New York Stock Exchange on 29 January 2021.
How did it happen? All because of the small investors of reddit.
The big and wealthy corporations earn big money when they short the shares of a particular company. It means to sell the shares of a company hoping to buy them later when they might be available at a lesser price. These firms used to sell millions of shares in advance and simply wait for the share price to fall. Then they bought it at a profit.
For example – You sell shares at $50 per share and then you buy them at $30 per share. In this process, you make a profit of $20 per share. But the plans were disrupted as small retail investors decided to buy more and more shares of GameStop which increased the stock price many folds and gave the Wall Street a run for its money.
I think the retail investors were fed up by the monopoly enjoyed by these big firms. By the way, everything’s we are talking here is completely 100% legal (you can do it too). But here’s a twist, when these small retail investors did this and the stock price skyrocketed, a free trading platform named “Robinhood” stopped people from trading on its platform.
This wasn’t very well received as they were stopping people to trade on a free market and there were allegations that they were trying to protect the big and wealthy corporations who have been doing this since decades and also getting away with it. People were reminding Robinhood the fact that they were founded on the promise of “Democratizing finance for all”, not for guarding the big and wealthy corporations.
The investors are still holding their ground and aren’t selling their shares. They plan on buying more and more shares. They want to jack-up the prices even more and this will hurt the big firms even more badly.
Wall Street started bleeding Cash
Short sellers lost an estimated $23.6 billion on GameStop in this rally. Melvin Capital lost 30% of the $12.5 billion it invested in managing shorted stocks. After hedge funds lost money, Wall Street demanded that short selling be made illegal even though it’s a practice commonly used by everyone.
This led to a massive backlash on social media where “the rich” were accused of manipulating the stock market in a way that kept others out. Several Congress members also cried foul.
This was definitely quite a case study in itself.
- What do you think?
- Who do you think is right?
- What would you have done if an app had stopped you from trading in a free market?
Do tell us in the comments. Your comments are valuable to us and we will be responding to the ones we find interesting.
