2021 is proving to be stranger than fiction in most cases. Within the first month, we have seen several events that have lit up our news feeds for various reasons.
The most recent one is the showdown between the amateur Reddit traders and the wall street biggies and in the centre of it all is a video game retailer, GameStop.
This is a classic case of using the loopholes in the system to ultimately break the system.
A brief trading tale
For all those wondering what is the whole hoopla about, here’s a quick summary of the events at the Wallstreet.
A struggling videogame retailer, GameStop, saw a huge spike in its stock price after a bunch of Reddit traders banded together to fight the Wallstreet Hedge Fund managers who were trying to push its price lower and devalue the company.
This was particularly in the spotlight because this spike was based on sentiments and without a clear business reason.
Hedge fund managers are a group of investors who make their profits by short-selling the stocks that are failing. ‘Shorting’ a stock means that the investor borrows a stock from the broker and sells at the current market price.
Then one waits for the price of the stock to fall so they can buy it back at a lower price and then repay the stocks to broker and make a profit of the difference.
For instance, if a stock is borrowed at INR 30.00 from the broker and sold immediately at INR 30 but when the price falls to INR 25.00, the trader buys back the stock, returns to the broker and makes a profit of INR 5.00.
This means that huge bets are made on a stock failing. In the case of GameStop, however, instead of the stock price falling as predicted, the price spiked higher than ever as a Redditor noticed that the hedge fund had made several short trades on GameStop and convinced everyone on his thread to buy as much GameStop stock as they could.
This resulted in the hedge fund losing billions in its short position that surpassed its own net worth and they had to close their short positions and buy back the shares at a much higher price as they still had to return the stocks to the brokers.
The Redditors short squeezed the fund to bankruptcy and are now looking at other hedge funds with massive short exposure.
While the financial world is facing the brunt of individuals coming together against the privileged few, the internet was abuzz with memes and opinions regarding the incident.
Below are some of the interesting ones we found: