It has been a wild ride for GameStop, the video game company that was going bankrupt has now been valued higher than Delta Airlines.
Basically here is what happened. At the beginning of January, GameStop had a change of leadership since the company was going broke. This change of management caused some optimism at the company that things would go better. But investors thought that optimism was overvalued and short-sold their actions (or stocks).
*Short Sale: An investment or trading strategy that speculates on the decline in a stock or other securities price.
*Broker: A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal.
*How stocks work: Over a one-month period, an investor believes that the stocks for Amazon are going to drop. Since the investor doesn’t own stocks of the company, so he goes to a broker that will lend him a stock for a month. After that month he has to give it back plus some sort of percentage fee. Now that the investor has the stock he will proceed to sell it to the market. Since he thinks that the stock price is overpriced he will sell it for 50 bucks (for the sake of argument). So now the investor is going to sell the stock that he has borrowed from the broker at 50 bucks. After a month goes by he has to return the stock to the broker, now because the investor was right and the Amazon stock prices went down during that month he is going to buy the stock back from the market. So now the inverter will pay 20 dollars to get the stock back and give it back to the broker plus 10 dollars fee. Just like that the investor has made 20 dollars profit.
So here is what happened to GameStop.
On Reddit there is an online community called “Wallstreetbets” and they noticed that a lot of investors started to short sell their stocks for GameStop, so the people who are part of the Wallstreetbets Subreddit decided that it would be a bad thing for the actual Millionaire Wall Street investors in New York if the stock prices for GameStop suddenly skyrocketed. So what happened next is that most of the Reddit investors got together as a community and boosted the stock price up by buying all the stock that exists for GameStop and not selling it. Due to that action, the stock prices for GameStop became really expensive so now the investors that sold the stock price for 50 bucks, would have to buy it back at the end of the month for 200 dollars in order to give it back to the broker. So now what the Reddit investors are thinking is that the longer they do this the more of the Millionaire Wall Street Investors (MWSI) will lose money.
At one point the Reddit people are going to notice that by selling their stocks they are going to make a huge profit out of it and by doing that it will make the stock prices for GameStop go down, and it is just a matter of time until that happens. The MWSI are hoping that the stock prices will go down since they know it is just a matter of time, so they are betting even more into short selling more stock. But that thing that they are going right now will only screw them further since they are creating more of an impetus for people to continue buying the stock and setting it even higher.