Just as a smaller David took on the mighty Goliath, a small group of people in the U.S recently brought a big financial company to its knees.
To understand what happened, let's first take a look at the players.
GameStop is a struggling game store company that has lost much of its value during this pandemic. Reddit is a social media platform where people with different interests get together. And Robinhood is an application that allows people to trade in stocks.
Next, let's learn the basics of stock trading.
Stock Market, Shorting, and More
In the stock market, one buys and sells stocks--rather, you buy a share (tiny portion) of a company you believe in. To learn more, read our earlier article HERE.
If enough people buy shares from that company, the company’s stock price goes up. You can then sell your shares for more than you bought them for, making a tidy little profit. If the price of stocks goes down, you lose money.
But the opposite is also true: if the stocks become worthless, investors can make money too.
Imagine this: You borrow your friend’s brand new bike. But instead of riding it, you sell it to a used bike shop for $30. Then, you buy back the bike, which the overstocked shop later sells for $20. In the end, your friend gets his bike back, and you get $10.
This is called “shorting,” or short selling a stock. You “borrow” stock from a company and meanwhile sell it to others. If the value of the company’s stock goes down, you can buy it back later for a lower price. But there’s no guarantee of the stock’s price. Imagine returning to the shop only to realize the bike is now worth $40!
The Robinhood Story
Shorting is one of the strategies practiced by many Wall Street companies who manage their clients' money. Since COVID-19 has hurt many businesses, these Wall Street funds have hugely profited.
On the social media platform called Reddit, a group of people decided to band together and buy the shares of GameStop. Their plan was to drive up the stock prices so that the Wall Street investors would be forced to buy more stocks to minimize their losses.
So, they went to an online trading platform called Robinhood and bought GameStop shares. At one point, Redditors (Reddit users) inflated the prices of GameStop by nearly 2,000%. What at first, seemed a huge profit became a huge loss for Wall Street hedge funds--one firm even lost billions of dollars.
Many people profited from Gamestop's stocks, including 10-year-old Jaydyn who made nearly $3,200!
However, money is not the only motive. Some see it as getting back at wealthy Wall Street hedge funds that have benefited from others’ economic struggles. Others are using this to send a message to government and financial regulators to wake up and do their jobs.
How will the GameStop story end? Only time will tell.
Sources: BBC, NYTimes, KQED, CNBC