by Daniela Morales
At the end of January, the ridiculous rise of GameStop Stock dominated the media landscape. There were memes and interviews with expert economists. And many of us wondered, Why is it such a huge deal?
For the regular person, the stock market is a mystery. The only certainties may be if the economy is supposedly doing well then that’s good; and if it’s doing badly, then everyone’s in big trouble.
This cursory understanding might be enough for some people. However, by not knowing the basics of the market, we become easy targets for those with power. Before getting into why GameStop was important, here are a few terms that everyone should know and understand:
Stocks or shares represent a fraction of a corporation. If you buy a stock, you’re buying a part of that company and are entitled to that portion of the corporation’s assets. By owning a stock, you’re able to vote in shareholder meetings, receive dividends (a portion of the company’s profit), and sell it.
They’re the basis for the market: companies put out shares or “go public” in order to collect funds and expand their business with investors’ money, and in return, both hope to profit.
This refers to an investing strategy that is high risk and high reward. Instead of wanting the price to go up, investors who short sell want the price to go down. They don’t outright buy the company’s shares. Instead, they borrow it from a broker and sell it in the open market, hoping to buy it back at a lesser price than they borrowed it for, and thus make a profit from the resulting difference.
The high risk comes from the fact that if the share’s price doesn’t decrease and instead goes up, the losses can be infinite since a stock’s price isn’t capped. This strategy relies solely on speculation. It’s basically a bet against a company.
Hedge funds are private investment partnerships where investors pool their money and invest in multiple aspects of the market at once. So instead of only buying one stock, putting money in a hedge fund would buy you multiple shares in different companies and types of assets.
Now, what sets hedge funds apart from mutual funds is that they often use non-traditional investment strategies (like shorting) and only accept people from the cream of the top, the big time investors who will pour ridiculous amounts of money into the market.
This term refers to individual, non-professional investors: people like you or me who might have some extra cash and decide to invest it in the market by trading in online brokerage firms or other types of investment accounts. The volume of the trades is significantly smaller than, say, a hedge fund.
In the stock market, retail investors are often criticized because by not having the necessary knowledge or expertise to research their investments, they tend to prevent the efficient distribution of resources in the market or be prone to cause panic selling, where a stock is sold on the basis of fear rather than analysis, causing the price to drop.
Now that we have the key players and props, let’s set the stage for the rapid rise in Gamestop’s price.
At the beginning of the summer of 2020, some hedge funds were betting on GameStop’s price falling (shorting) due to the classic pandemic consequence of everything moving online and the company already having had some trouble with that even before the pandemic started.
In January, retail investors (specifically those involved in the Reddit thread WallStreetBets) started noticing that there were a lot of GameStop’s shares being shorted. These investors started hyping each other up to buy GameStop shares and thus drive the price higher, forcing these hedge funds to buy the shares back at a higher price, which pushed the stock even higher up.
They pulled a strategy often used by the hedge funds themselves against those very same hedge funds. Small, everyday traders won, and in turn made all those hedge funds lose huge amounts of money.
So, why should you care?
The past year has shown that the stock market doing well isn’t a representation of the health of the economy, and that what it does represent is the rich making money off of the hard work of working class people. Not only that, but this event called back into attention the wild disregard with which hedge funds treat the market, which was what caused the recession in 2008.
We live in a capitalist society, where money is the asset people on top will listen to. Money listens to money. The way we use it or push for it to be used will generate change.