The Newbie Guide to GameStop Stock Market Drama

GameStop this, GameStop that. By now there’s a pretty high likelihood that you’ve heard about GameStock and the entire stock market hullabaloo. For the uninitiated, the Stock Market can look like a complicated and impossible subject that has to do with weird calculus graphs running across the screen of your device.

However, we live in a version of the stock market on a daily basis; the physical market. It’s simply about buying and selling, and the forces that impact that. Therefore, this article is to help you understand what all the fuss is about and hopefully learn some useful information. Here is the beginner’s starter pack to understanding the Gamestop Stock Market craze and all the terms surrounding it.

Hedge funds are financial partnerships that use pooled funds (money gotten from different sources like investors) and employ different strategies to earn active returns for their investors regardless of the direction of the stock market. They can do this because they have freer rein to invest aggressively and in a wider range of financial products than most mutual funds. Hedge funds also make use of leverages (borrowed capital) to trade.

Shares are units of ownership of a company. People who own shares of a company are called shareholders. Now the stock market generally works by a trader buying shares of a company at a particular price and selling it at a higher price to gain profit. The more the demand is (shares bought) the higher the stock price at that point in time and vice versa.

There is also something called Short selling. A short is when an investor believes the stock of a company will reduce in value by a set future date and borrows an amount of stock from a broker and sell it immediately to buyers willing to pay its current market price. The trader speculates that the price will continue to drop, hence they will buy it back at a lower price, return the stock to the broker and keep the difference as profit.

In layman's terms, Let’s say you believe apples will become cheaper in 1 month, therefore you borrow an apple from Mr. Alex (broker) for $5 and promise to give him back the apple in 30 days. You sell the apple at the present market rate of $100 and expect the price to fall. After 29 days, the price of apples is now $70. You buy back the apple, return it to Mr. Alex and keep the $30 profit.

However, if you miscalculated and the apple’s price starts rising, you will be at a loss. The more the apple’s price rises, the higher the losses you will have. So if after 10 days, apples sell for $120, you will be at a $20 loss. If in 15days, apples become $145, you will be at a $45 loss. In other words, there is theoretically no limit to how much you can lose. If you lose your entire capital, you become bankrupt. This is what is called a short. Before you lose all your capital, you eventually buy back the stock at a loss, however, this further raises the price of that particular stock price, creating what is called a squeeze.

This is what happened when a subreddit forum on popular Reddit website, Wall Street Bets with over 5 million members as of Friday, decided to take arms against “big corporate”. Someone on the subreddit forum noticed that hedge funds had taken a massive short against brick and mortar game shop Gamestop which has been making losses in previous years, and hypothesized that the stock was undervalued, convincing everyone on the thread to join forces and buy as much as GameStop stock as possible. This led to the hedge funds losing billions of dollars, and even some of them going bankrupt. Thus began the “Great War of Finance” between the billion-dollar hedge funds and the retail investors.

In a bid to mitigate the losses of the hedge funds, popular stock trading app Robinhood which is one of the biggest online trading platforms in the world prevented the retailers from buying more shares but allowing them to sell, to bring down the stock price of GameStop. In response, several traders have filed a class-action lawsuit against the trading platform claiming the app is preventing free democratic trade. Even unlikely alliances from GOP Senator, Ted Cruz and Democratic Representative Alexandria Ocasio-Cortez are among the elected officials calling for an investigation of Robinhood. Robinhood, which was had been eyeing a potential 2020 IPO just raised $1 billion just a few months after raising hundreds of millions of dollars from its difference, signifying the trading platform was either facing or just narrowly avoided a liquidity crisis and has promised to slowly ease restrictions on the 13 stocks and cryptocurrency Dogecoin being pumped by the retail traders.