this is how the GameStop case is explained

Wall Street has been shaken in recent hours after the price of GameStop, a well-known chain of console, video game and accessory stores, skyrocketed who hadn't raised his head for a long time. Changes in consumer habits in general and the pandemic in particular have not favored this company as is logical.

If in 2007 a GameStop share was worth $ 62.11, in March 2020 it marked an all-time low of 3.50. So far this year, the stock has grown 400%: It has gone on to be worth 90 dollars, marking peaks of up to 160.

GameStop shares have soared 400%, thanks in part to investors gathered on Reddit.

And how has everything happened? In principle, according to what we know, thanks to the power of the internet (and Reddit). In particular, investors in the subrredit called WallStreetBets as well as TikTok users led by a person who calls himself Roaring Kitty.

What is happening and how is it possible

Image from WallStreetBets

The key to the matter, beyond the organization of a certain number of people, is short investment. When a person invest waiting for a stock to fall you are said to be taking a short position; he is betting on the bad. You won't win if the company does well, the usual by taking a long position.

And how do they do this? Simplifying it a lot, through equity loans and the motto "buy low, sell high", but in reverse order. The short investor asks an investor who has shares in a company to lend them to him, paying him something for it. When you have the shares, you sell them and wait. The idea is that the listed company drops in price to buy the same number of shares for less money and, now, return them to the borrower.

The key to investing in short is the hackneyed slogan "buy low, sell high", but in reverse order and with a prior equity loan.

Stock markets crash because everyone sells. But the data says holding on is more profitable

The benefit is obtained by the difference between the sale and the purchase, discounting from it the price you have paid for the loan.

As well, GameStop's short investors had a problem. The company brought fresh air to its management with the entry into its board of directors of a founding shareholder of a store on-line of pet food and was shyly recovering in the bag. With this, those who took short positions were going to lose a lot of money.

All this unleashed the madness. On the one hand, short investors buying at high prices to hedge their short positions. On the other, investors buying GameStop shares due to its good performance. Between these two groups, a second type of short investor who continued to think that the company was going to fail at any moment. And, the latest to appear, Reddit's WallStreetBets.

GameStop saw the light at the end of the tunnel after changes in its board of directors and a new vision of what its future had to be, bad news for short investors

Made up of more than 2 million users, this subreddit they take the bag as a game, which is in the eyes of many, and they try to be noticed. On Friday, on the Discord channel of this group, calls were made to buy shares of GameStop that it seems that they worked (surely with other factors involved) raising the stock from 20 to 60 dollars. The share transfer volume was 12 times higher than usual.

The big losers in it all, right now are being short investors and particularly hedge funds or high risk They trade precisely by taking a short position.

If it's already risky to go short, for all that this implies, the entry into action of a multitude of coordinated purchases through Reddit (or otherwise) turns everything upside down. And above all, it shakes the foundations of the gigantic Wall Street hedge funds that work thanks to shorting. They are also a risk for companies and for the market, of course; in fact, a year ago, in Spain and other European countries bearish bets were prohibited to curb panic in the markets.

The new threat of the 21st century

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In this article by Magnet it was perfectly reviewed what large groups of people with particular interests are capable of doing. From something more or less affordable to a large coordinated action such as the closure of the TikTok account of a digital gossip entrepreneur to more serious matters such as the launching of DDOS attacks against media that do not publish information about a certain musical group.

In the case of the WallStreetBets of Reddit and GameStop (although now also BlackBerry), the effects are not a trivial matter. Beyond the stock market earthquake that has caused with these important changes in valuation and the losses that can be triggered in all those short investors, constituting an additional threat for those who practice the controversial shorting, outstanding milestones have been set.

David (Reddit investors) has beaten Goliath (Wall Street's old guard) for now; the question is whether history will repeat itself

TikTok is generating a new elite of famous teenagers: these are the ones that are exploding in Spain

Monday's session on the US stock market is summarized as follows: In a single day, 32 million call options have been issued, or bets that certain values ​​will rise, the second highest figure in history. In fact, the New York Stock Exchange had to stop its actions up to nine times due to the volatility it was experiencing. All this favored by the ease they provide to invest in services such as Robinhood, especially popular among the youngest.

David (Reddit investors) has beaten Goliath (Wall Street's old guard) for now. The question is whether this particular game, with such obvious effects, is here to stay.

Main Image | Mike Mozart (CC BY 2.0)