You've probably heard about GameStop shares going through the
roof. Here's how it happened and what it means. On the stock market,
you can buy shares in a company and the price can go up or down
depending on how much demand there is for those shares.
Generally speaking, you hope to buy shares at a low price and
sell them again when the price is higher so you have made a profit.
But people can also make money betting that a company's share
price is going to go down. That's called shorting stocks and
it played a role in what happened with GameStop. Here's how it works.
Say you own a share of an apple tree, one apple, and you're happy
to lend it to me in exchange for some commission or interest.
The value of this apple on the open market is £10.
But I think that's going to go down in the next few days.
So, I immediately sell the apple for £10.
I've made £10, brilliant. But I still owe you an apple.
So in a few days' time, when the price has fallen to £5,
I buy an apple back and return it to you with an interest payment.
I've made a nice profit. Usually there'd be a third-party
broker involved in all this, but this is the basic principle.
The price drop in that example was big, but it doesn't have to be.
Multi-million dollar investment companies known as hedge funds can
do this at scale and make a profit from even a small drop - and by
selling large volumes of shares at once they can push the price of
the shares down, to their benefit.
But if the price of the shares goes up after they've sold them,
they're still on the hook for those shares. They have to return them.
So they may be forced to buy them back at a higher price and can
stand to lose a lot of money. That's what happened with GameStop.
People on the message board Wall Street Bets had noticed something
about GameStop, the high street video games retailer in the
US that has been struggling, especially during the pandemic.
They saw that hedge funds were betting against GameStop
in a big way, shorting more shares than even exist. How?
Well, say I've borrowed your apple and sold it to somebody else and
that person lends the apple to someone else who also sells it.
Now two of us are on the hook for an apple.
You might have got away with it, but investors on Wall Street Bets
saw the opportunity to buy GameStop shares, hoping it would push
the price up and totally mess up the plan up for the hedge funds.
And it worked. Now, there was more demand for the shares than supply,
and the hedge funds were forced to buy their shares back
at large prices, losing billions.
Along the way, some users on Reddit made a fair bit of money
for themselves too. After seeing what happened with GameStop,
people turned their attention to other brands like AMC cinemas,
where the same thing was happening. Some of the platforms and apps
that let you buy and sell shares, like Robinhood in the US,
then intervened and stopping people from buying GameStop shares,
which really angered a lot of the investors who said Robinhood was
interfering in the open market and protecting the hedge funds.
For its part, Robinhood said it had limited trading to
protect investors and it had to comply with regulations.
It has since allowed some trading of GameStop shares,
but certainly there is a view that there is one rule for
big corporations and another for independent investors.
flawed and we are in the wrong. It makes no sense to me.
- I think Robinhood stopping investors from buying the stock
is the biggest example of market manipulation and I think...
go and look at their app reviews. They're getting hounded right now.
- If they think Wall Street Bets should be investigated by the SEC,
Robinhood should just as equally be investigated. The fact that they
can pigeonhole and select stocks that we are not allow to trade
openly in free market, made by the people with our money, is horrid.
It makes no sense. - What happens next?
Well, as with any investment the price could go back down and
people who bought GameStop shares at a high price could lose money.
But for many of them it was not about making
money in the first place. It was about sending a message.
Many say this is a turning point for stocks and shares
and it could happen again. - I don't care about the money.
I could lose everything. And I'd be so happy because I just love
what's going on. - This could be a trend.
I mean, we're playing within the rules
we're not sharing any insider information.
It's just a collective group saying to buy specific stocks.
They can't really control this.
Once the internet takes hold of it, there's no stopping it.