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January started with the Wednesdays of Insurrection (Jan. 6), Impeachment (Jan. 13) and Inauguration (Jan. 20), and of course, it could not stop there. Wednesday, January 27th featured the final “I” of the Wednesdays of January 2021: Investment. Sure, 2021 is proving to be an interesting year at only a month in, but who even understands what happened on the final Wednesday of January?
Let’s break down what happened with GameStop, in terms that non-economists or “Wolf of Wall Street” types can understand.
First, we’ll need some definitions to truly understand where the traders, hedge funds and investors at large are coming from:
Stock Market: Frequently referred to as a “public-sharing network,” the stock market essentially allows average citizens, who have no other affiliation with a company or stock, to purchase shares of a company to have a sort of “partial ownership.” The “ownership” that comes with the stock is not something that allows you to show up at the company board meetings, but you are impacted by the decisions that are made at these high-ranking meetings when it comes to changes within the company.
Short-Selling: A technique that relies on the assumption that the price of a stock is going to dramatically decrease, sooner rather than later. Essentially an investor borrows stocks from a lender for a period of time and then sells the stock to another buyer at the current market price. After the price has dropped, the investor then buys the stock back from the buyer, at a lower price to turn a profit, then returns it to the investor, pocketing some money. (i.e. You borrow a $50 stock from Ms. Smith and then you sell it to Ms. Doe for $50. Three days later the value of the stock is now $42 so you buy it back from Ms. Doe at $42 and return it to Ms. Smith. In a few days, you turned a profit of $8.)
Pump-and-Dump: Buying stocks at a low price based on false or misleading information in order to inflate the price, then selling all of your stocks to make money.
Hedge Fund: A partnership of investors that engage in high-risk investment methods, largely based on borrowed funds, in the hope of making large gains.
Robinhood (Not Sponsored): An app that allows people who want to get into investment on the stock market but may not know how-to with a more simple introduction to the market, and with no commission. Most people using Robinhood are lower-value investors and are just getting started on the market.
So, what happened on the final Wednesday of January? A while prior, there was a Reddit feed, r/WallStreetBets, that recognized that a lot of hedge funds and investors were short-selling shares of GameStop. The Redditors decided that it would be interesting to screw around with the hedge funds and investors and go on a buying spree to increase the price of the stock, knowing that the short-selling investors were going to have to buy the stock at an increased value. Due to the volatility and impact of 2020 on the GameStop stock and the nostalgia associated with their memories of GameStop, the Redditors decided that it would be the best stock to move forward with their plan.
Using Robinhood, the Redditors started investing in GameStop and did exactly what they set out to do. Consequently, the price of the GameStop stock rose over 1000%, all thanks to a Reddit feed. The next day, Robinhood ceased trading of the GameStop stock, but much of the potential damage had already been done.
There are some questions about the legality of the actions of the Redditors. Was what they did completely legal? Was it any different than what hedge funds and investors regularly do? Was it all just a large-scale pump-and-dump?
Although there will likely be an investigation into the entire strategy and happenings of the day of Investment, we may not ever know due to the anonymity laws surrounding the entire stock market and investment industry of the United States.
There are many theories out there surrounding the question of who was behind this entire mess. If you’re interested in it, check it out; but again, we may never know the truth.