One firm in particular, Melvin Capital, had taken a huge amount of short trades against GameStop, betting on its value declining. Investment firms, meanwhile, are in crisis. One Reddit user has claimed to have turned $50,000 into $11m (£8m), and there are many others like them who have made dramatic returns on their investments. The result? Apparently making some ordinary part-time traders very rich, while losing some hedge funds huge amounts of money and angering the industry in the process. GameStop shares, which were valued at around $20 at the start of the month, shot up to around $350 – a 1,800 per cent increase. GameStop” outlined the plan, and helped get the movement off the ground.
This post from September, titled “Bankrupting Institutional Investors for Dummies, ft. The two million-strong membership realised that if enough of them worked together, they could inflate GameStop’s stock price by buying shares en masse. Members of the Reddit community noticed that investment firms were short selling GameStop’s stock, and decided to react. This means buying them back for more than they sold them for, and therefore losing money. However, if the stock’s value increases, the short sellers must still return the shares. If the stock’s value decreases as they predict, the short sellers will make money, as they buy the shares back at a reduced price, return them to the broker at this price and pocket the difference. They must then, at some point, buy back those shares and return them. Short sellers borrow shares of a stock, usually from a broker-dealer, before immediately selling them at the market price. Short selling is a tactic used by hedge fund managers and investors who are essentially predicting that a stock’s value will go down.
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How have they cost the investment industry so much money?įor a full breakdown on exactly how r/WallStreetBets managed to drastically increase GameStop’s share price, see our explainer.Įssentially they have taken advantage of a hedge fund investment tactic known as “short selling”. Many in the community could be described as “day traders” – the term for people who buy and sell stocks within the same day, in an attempt to profit from short term price movements. The GameStop drive certainly falls into this high-risk category. It is known for highly speculative, risky and often short term trading, which is considered more a form of gambling than investing. People use the subreddit to discuss stock and option trading. Its “about” section describes it as follows: “Like 4chan found a Bloomberg Terminal.”
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