By: Nick Gambino
As we fumbled into 2021, if you had told me by the end of January GameStop stock would be trading at unprecedented numbers, I’d have…well, I’d have believed you because this past year has been putting up crazy numbers on the Weird Scoreboard. I’ve learned my lesson in not saying, “Now, I’ve seen everything” because I know something else I’ve certainly never seen is lurking around the corner.
This week saw Reddit users ban together to stick it to the man. The Wall Street man to be exact. In something born only of a social media age, a Reddit user took to the platform to call out a hedge fund which had just shorted GameStop in a massive move. While this is common in the world of hedge funds and the stock market, it’s rare to see Goliath meet its match, which in this case is a mob of angry Redditors.
The user proposed everyone buy a ton of GameStop stocks and force the price of the stock to rise, effectively screwing the hedge fund that thought it was so clever when it banked on the stock dropping so they could clean up.
The idea of a short is to bet against a stock. You effectively borrow stock from a broker and sell it at the current price. When the price drops, you buy it again at the lower price, return it and keep the difference. So, you borrow it, sell it for $10, wait for it to drop to $6, buy it again, return the newly bought stock to the broker, keep the $4 difference.
The thing is, this crazy Reddit scheme worked. Users bought massive amount of GameStop stocks and drove the price of a fledgling brick-and-mortar video game store chain stock through the roof. The hedge fund quickly started hemorrhaging money to the tune of billions. In fact, they lost so much money on the failed short because they had to buy back all the stock at such a high price (forcing the price to go even higher), that they had to file bankruptcy.
It was so catastrophic (depends who you ask) and volatile that Robinhood closed trading on GameStop for most of Thursday and as of Friday are only allowing limited buys.
This may be the only event that could force the entire populace to finally grasp what the hell a short is. Listen, if I had a dime for every time I tried to look up what shorting a stock was, I’d have been able to buy enough stock in GameStop to bankrupt that hedge fund myself.
Thankfully, I found plenty of Cat-in-the-Hat explanations on the internet from people a lot smarter than me. I felt like Michael Scott, “Explain this to me like I’m 5.” I finally got the concept locked in my head. Maybe I’ll go re-watch The Big Short and actually understand what’s going on this time.