The internet is ablaze with the word Gamestop, as internet day traders target Wall Street billionaires and generate fortunes along the way. 

The results are extremely volatile, and have been changing very quickly. On Wednesday, GameStop’s value rose to over $10 billion, as thousands of internet users, particularly Reddit users, joined the rush of people buying up GameStop shares (units of ownership of the business). Once trading platforms put restrictions on the stock, the shares went down 44% in value. Now, though, they are back, with today’s increase so far of 51.58%.

What exactly is happening?

At least two major hedge funds were shorting GameStop. To ‘Short’ is to bet against a stock, thinking that its value will decrease. The way this works is, the investor borrows shares from a stock broker, with the promise of returning them later. Then, the investor sells them. If you do it right, when the price of the stock you’re shorting falls, you buy back the shares you sold earlier, and keep the difference. You then return the stocks to the broker you borrowed them from, and pocket the extra money. 

What’s risky about this is, if the price rises instead of falls, you stand to lose a lot of money.

So, various major hedge funds, the main being Melvin Capital, shorted GameStop, predicting that its value would decrease. But the short was very unsuccessful, for various reasons, the main being the Reddit forum r/wallstreetbets.

With over 6.2 million members, the forum has enormous buying power – and they put it to use. Some have bought shares of GameStop, but most have bought options, which can include shorts or the opposite of shorts – bets that a stock value will increase. 

With these, the investor enters a contract which allows them to buy a stock at a set price in the future. If their bet comes true and the stock rises, they can buy the stock and save money, and sell it for a profit. 

For example, a stock could now be worth $30 a share. You could enter a contract that allows you to buy a stock for 30$ in a few days if you wish. A few days later, the stock could have risen in value to $50. You fulfill your contract and buy that stock for $30. You then sell that stock for $50, and make a profit of $20. You can do this for hundreds, even thousands of shares, and now you can see how people can make fortunes through stock options. 

To ensure that the contract will be fulfilled from the broker’s side, the broker selling the contracts buys some of the shares that they would need if the investor wishes to purchase them. This usually doesn’t change the stock price. But, if enough investors make big bets, the broker is forced to buy several shares. The demand is thus increased, and the supply decreased, so the stock price rises, and continues to rise. This is how you get to crazy numbers like 200% increases and more. This is also how you bankrupt hedge funds like Melvin Capital who were aggressively shorting the company.

What Next?

The trading platforms these Redditors are using (like Robinhood) restricted trade options on Gamestop yesterday, to the great outrage of the Redditors and also several lawmakers, such as House Representative Alexandria Occasio-Cortez, who said in a Tweet, 

“This is unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.

As a member of the Financial Services Cmte, I’d support a hearing if necessary.”

Senator Ted Cruz, in response to this tweet, replied, “Fully agree”. 

Robinhood has now allowed “limited buys” on the stock. 

But when will the frenzy end? And how? We don’t know. There are various possibilities – one being that it will harm investors who are on neither side of the conflict. If those hedge funds raise money to cover their losses, they might need to sell vast numbers of unrelated stocks, which could push their prices down, meaning that the investments of neutral traders would decrease in value. 

Hopefully, it turns out well for the working class and the retail investors, so that some real change can be made to the goliaths of Wall Street and the corporate greed in which they wallow. Whether it will. . . that, we’ll have to see.