If you’ve been following major news, meme pages, Twitter, or just about anything, then you’ll know the stock market in the US has had an insane week. And while we aren’t the Wall Street Journal, we can shed a little light on the situation. Here’s a simple explanation of WTF is happening in the stock market.
For almost a decade, a subreddit called WallStreetBets has functioned as an online forum for people to talk about their bets or positions in the stock market. These bets usually involved something called ‘options‘, which is beyond the scope of this article. With the stock market going haywire this past year, the subreddit grew to almost 2 million members (of course, the sub now has 4M+).
Then, a few weeks ago, a paradigm shift occurred. Basically, members figured out that enough people were following the forum to seriously influence the price of a single stock. The first major target? GameStop, which is poetic in and of itself. But, there was a pretty good reason for that choice. More on that in a bit.
— Elon Musk (@elonmusk) January 26, 2021
In a sequence as historic as The Big Short, WSB users (and regular investors) started causing the GameStop price to rise, skyrocketing the stock from $17 to over $500 a share in a month. For reference, that’s well over 2000%. This past week, the stock averaged daily gains of around 100%, before crashing spectacularly Thursday morning.
Explaining how a subreddit named WallStreetBets has turned GameStop from a $17 stock to a $300 stock
Now, the other side of the coin. A major reason GameStop was chosen is that a lot of actual investors and traders were betting against it. These traders had borrowed shares from other people and were planning to sell them at a lower price. Then, they would keep the difference between the price they borrowed and the actual sale price. A $10 borrowed share drops to $5, is bought at $5, and the trader makes $5 when they return the share.
This is sometimes known as a naked short, and the problem is that the potential for loss is theoretically unlimited (a stock price has no ceiling, but can only go down to $0). Not only that, but we’re talking about millions of shares, representing billions of dollars. Well, these WallStreetBets users saw the shorts, and challenged them (the pros) to a schoolyard fight, so to speak.
They were winning, too. But, this morning, the American trading platform RobinHood (and a few others) pulled an unthinkable move. They decided to ban their users from purchasing shares of what was now a handful of companies (which we admit is a hilarious list– Bed Bath and Beyond, BlackBerry, Nokia, and the movie theatre chain AMC were on there as well).
Here’s an analogy. For months, you’ve had a casino let pretty much anyone with a few hundred dollars in to gamble. Then, all of a sudden a ton of your patrons figure out how to count cards (which isn’t manipulating the game, just profiting off its structure). Rather than change the structure, you tell all these people they can no longer play blackjack, all they can do is cash in their chips.
Keep in mind that not everyone has been banned from the table though. Pros and other ‘players’ can still sit down, and while you’re on the way to cash out (since playing is no longer an option), they ruin the value of each chip.
So yeah, that’s a quick rundown of what happened in the stock market this week. Godspeed, retail traders, see you on the moon.