A wild frenzy that has attracted the world’s attention is happening, and it’s a battle being played out on the internet. Amateur traders match blows with massive hedge funds, as tech-savvy young day traders are using social media platforms such as Reddit to buy up shares in a failing video game retailer GameStop.
Over the past week, shares are up by more than 300%, with another 120% added on Wednesday trading on Wall Street.
And it’s not only GameStop but also AMC, Macy’s, and BlackBerry that have set the market on fire.
It began when a group on Reddit called WallStreetBets noticed that some big hedge funds had taken ridiculously large short positions against GameStop, and they sensed an opportunity, reported The Washington Standard.
It dawned on them that if everyone were to buy GameStop at the same time that would probably cause a short squeeze of massive proportions.
And that is exactly what eventuated. Twelve months ago, one share in GameStop sold for around $4. At the start of January 2020, a share was worth $17.25. Incredibly one day ago, it closed at $347.51.
The Reddit group didn’t only have profits on their mind. It was revenge they were after.
Melvin Capital, the $12.5 billion hedge fund founded by Gabriel Plotkin, was one of the Reddit campaign’s main targets after an SEC filing revealed that the fund had a large short position in GameStop reported The Washington Standard.
A short position is a practice where an investor sells a stock that he/she doesn’t own at the time of selling; the investor does so by borrowing the stock from some other investor on the promise that the former will return the stock to the latter at a later date.
- By doing so, the position the former investor takes is called a short position, and the process of selling the stock is short selling.
- In short selling, the maximum profit the person who takes the short position can make is the difference between the stock price when short-sold and zero. In that way, the maximum profit the investor can make from a short-selling is certain.
- The maximum possible loss that can happen from a short-selling trade is unknown beforehand.
Short sellers like Melvin Capital have made obscene amounts of money over the years by manipulating the markets and preying on weak companies.
One Reddit user wrote on Wednesday, Jan.27, that they were out to punish Melvin Capital, “By the end of the week (Or even the end of the day), Plotkin is going to have less than a college student $50k in debt who works part-time at Starbucks.”
For now, the big players are suffering, but the small investor’s bubble is sure to burst in the future.
Short sellers have manipulated the markets for decades, preying on failing companies. Now the establishment is worried. White House press secretary Jen Psaki told reporters just a few hours ago that the White House is “monitoring” the situation.
An amateur internet mob has taken up the gauntlet and giving them back some of their own medicine.