I don’t write about investing much here, but when the whole world can’t stop talking about some aspect of the stock market, I had to take a look. It seemed like every single place I looked, there was something about hedge funds being toppled, people getting rich, and, perhaps most inexplicably, GameStop.
What Happened with Gamestop?
The stock market can be a place where people make a ton of money but it can also be highly confusing. This particular subject is one that’s an extra few levels of crazy, so let’s take a closer look.
Short sellers and tall bets
The essence of the GameStop fiasco is that there are stock market players who do something called short selling. Basically, short selling is paying to borrow stocks – usually from a pension or something similar – and then selling those stocks. Later on, when the price of the stock goes even lower, they buy back the stocks they “borrowed” and give them to the pension they borrowed from. The difference in price is what they earn.
This is totally legal, even if it’s complicated, but it’s not without risk. If the price of the stocks goes up instead of down, the short sellers lose money. The most important part of short selling transactions is that you have to get the stocks you short sold back to their owners. If the short seller doesn’t get those stocks back, they’re going to be sued hard.
What happened with GameStop is that their stock was way down – around $2.50/share. Short sellers benefit when the stock of a company is low, because then they can buy it back for less than it was sold for when they borrowed it. However, when the subreddit Wall Street Bets saw what was going on, they decided to squeeze the short sellers. The whole subreddit jumped and bought as many shares of GameStop stock as possible, which drove the price from $18 in December of 2020 to around $350 when you and I heard about it.
That means that if the short sellers sold the GameStop stock for $5 and hoped to buy it back around $2.50, they were poised to lose money when it jumped to $18/share. When Reddit ballooned the stock to over $350, it was going to devastate the hedge funds that were short selling the stock. They either had to buy it back at a tremendous loss, or get sued for not keeping their end of the borrowing contract.
GameStop, Dogecoin, and widespread investing
When the larger media outlets take a peek at the internet, strange things happen. Wall Street Bets is a subreddit full of its own meme culture and there’s a lot of lingo that gets used there that has leaked into the mainstream. In addition to the memes, the interest in investing has started to reach people who would otherwise probably not consider it.
With interest sparked from Reddit, many people took to Robinhood and other investing apps to jump on the GameStop fun. Since winning on the stock market is fun, all of these newly interested investors have looked for new avenues for investing (since GameStop has peaked). Two of the big winners are silver and Dogecoin, both of which have surged as a result of the GameStop craziness.
Many seasoned investors have jumped on Dogecoin in the fallout of GameStopGate. If you don’t know what Dogecoin is, it’s a cryptocurrency based on the Doge meme, and was created mostly as a joke. Now it’s becoming quite lucrative and due almost entirely because of the short selling of the stock of a company having a difficult time.
All of this makes perfect sense, right?
Are you still confused about GameStop stocks?
If you need a quick tl;dr for all of this:
- Short sellers sell stocks they don’t own by borrowing them from a shareholder
- They sell them high and hope to buy them back lower so they can make a profit when they return the shares to the original owner
- The subreddit Wall Street Bets saw this activity and decided to dogpile onto Game Stop stock, driving the price up hundreds of dollars
- Short sellers would have to buy back the stock at a tremendous loss, or face being sued by the owners of the stock
- Because of the internet and media buzz about this, many novice investors got interested in the stock market with the Robinhood and Ameritrade apps
- These apps then shut down sales of GameStop shares, seemingly defending these giant hedge funds from the internet’s collective efforts and these new investors’ rights to do whatever they wanted with stocks
- Since Game Stop has slowed down, silver, gold, collectibles, and Dogecoin are hugely popular right now, all going up in value significantly
If you’re still confused, don’t worry – it’s a lot to take in. If you want to dip your toe into the strangeness that is Wall Street Bets lingo, and feel like you’re winning at investing without risking anything or actually investing, definitely check out this game I found on Plays.org called GameStonks. It’s a simple browser game that has you collecting Dogecoin while dodging obstacles, all based in the insanity of the internet’s freshest memes.
It’s a fun, light-hearted jab at the Game Stop trading fiasco and you can continuously try to beat your own high score. Think of it like Flappy Bird, complete with associated controversy and internet strangeness.
Did you manage to get some shares of GameStop before everything exploded? Has this whole thing got you interested in the stock market, at least from an onlooker’s perspective? I’d love to hear about it in the comments!