In the past few days, the buzz around GameStop, AMC, and Reddit has dominated the news cycle. One might’ve noticed several people online discussing investing in stocks and pondered, “What’s going on?” Some individuals possibly saw someone post about their return on investment from the stock market and proposed the question, “How do I get in?”
The most daunting question at hand is this: how does a stock like GameStop, which was valued at $20 just two weeks ago, become valued at over $300 seemingly overnight?
Here’s a recap of everything you need to know about the whirlwind of a stock market that investors have seen this week.
GameStock was the most traded company in the stock market on Tuesday (Jan. 26), but the bullish run-up started last week on Reddit. In layman’s terms, a hedge fund by the name of Melvin Capital Management bet against GameStock, expecting the video game retail company to underperform. Those who bet against a stock are often referred to as “shorts.” A Reddit room under the name WallStreetBets rallied its members to invest in GameStock and “short squeeze” the hedge fund. WallStreetBets eventually applied this same tactic to stocks like AMC and Blackberry.
What is a hedge fund?
Hedge funds are investment funds built on partnerships between traders and professional managers. Hedge funds have the ability to make investments and trades on a larger scale because it is comprised of a pool of various investors. More money equals more investing capital and power.
What Is The Difference Between Bull and Bear?
If someone is expecting the price of a stock to go up they are considered a bull, thus their position is bullish. If another person expects the stock price to go down, they are considered a bear and thus considered a bear. Often times shorts and bears are interchangeable.
What is a short squeeze?
Hedge funds and shorts bet the price of GameStock would fall. They were forced to buy shares in the company when a group of retail traders on Reddit began to buy the stock in bulk. Shorts being forced to buy these shares in order to cover for their colossal losses is considered a “squeeze.”
How did brokerages react?
Robinhood was one of the names floating around, but it isn’t a stock. It’s a brokerage, which allows regular people to invest in the stock market for free with the app acting as a virtual middleman. Robinhood was founded in 2013 because its creators felt “it was more important to build products that would provide everyone with access to the financial markets, not just the wealthy.”
However, when Robinhood stopped all purchases of certain stocks like GME, AMC, NAKD, NOK, SNDL and would only allow its users to sell on Thursday morning (Jan. 28), many began to question if they were really founded to help the average investor.
Robinhood told their users they “plan to allow limited buys” on Friday (Jan. 29) – but the restrictions they already enforced caused users to file a class-action lawsuit.
How do politicians come into play?
This is one issue that has caused bipartisan rebuke. Democratic Party Rep. Alexandria Ocasio-Cortez was very vocal on social media after other individual investing apps like WeBull, and TD Ameritrade joined in with Robinhood in placing restrictions on stocks that were a part of the Reddit run.
Republican Party Sen. Ted Cruz joined in agreement with AOC via Twitter. Ocasio-Cortez slammed Cruz saying, “You almost had me murdered … Happy to work w/ almost any other GOP that aren’t trying to get me killed,” referencing the U.S. Capitol riots from earlier in the month.
GOP Rep. Paul Gosar highlighted Bloomberg reporting that over 40% of Robinhood’s revenue came from companies like Citadel Securities. Citadel, LLC is the owner of Melvin Capital Management.
“Knowing the involvement Citadel has with Robinhood, it is clear that the actions taken today were motivated by anti-competitive reasons not for concerns of volatility claimed by Robinhood,” Gosar wrote in a letter to acting U.S. Attorney General Monty Wilkinson to refer the matter for a Department of Justice investigation.
“To be clear, this decision was not made on the direction of any market maker we route to or other market participants,” Robinhood said in response to these allegations.
These past few days have attracted many new traders to a market full of opportunity. Just remember to trade responsibly. In unprecedented times when brokerages and the government are getting involved with what’s supposed to be a ‘free market’, you must be aware of all of the risks.
Do not make any investments you can not afford to lose if things go awry and make sure you have a diverse portfolio.