All You Need to Know About the GameStop Stock War
Reddit vs. Wall Street. This wild story started when WallStreetBets, a Reddit forum about stock and options trading, decided it was time to teach hedge funds a lesson about the power of the internet.
After a hedge fund took a huge short position in GameStop (the video game retailer), a Reddit user identified that there weren’t enough shares of GameStop available in the market to cover the shorts. He invested his life savings in hoarding GameStop stock ($GME) and got a bunch of other Reddit users to also invest. GameStop stock exploded. Now they refuse to sell. That means the hedge fund has to pay ridiculous prices to buy the stock to cover their position.
The entire world has taken notice. Even people with no investments are asking, "What's going on with GameStop stock?" GameStop's stock became so volatile that Robinhood, the commission-free stock trading app, blocked anyone from buying shares in an unprecedented move.
But this is more than just a historic stock market event. This could be a turning point in world history. Here's everything you need to know about how Reddit traders are beating Wall Street at their own game.
Lesson 1: WallStreetBets
WallStreetBets (WSB) is a subreddit that launched in 2012 and today has more than 5.6 million subscribers. Many of them are millennials (born 1981-1996) and Gen Zers (born 1997-2010). In-jokes within the subreddit include referring to themselves as stupid (although they use a much harsher word that begins with "R") and jokes about being grateful that their wives have a boyfriend. It has a lot of 4chan-esque humor.
To have a full appreciation for WallStreetBets, it helps to understand the community's unique terminology. Some words and phrases they use include:
- Tendies: Short for chicken tenders, it's another word for gains or profits. Instead of money, users joke about being rewarded with "tendies." The term originated on 4chan. Some of them might not be joking.
- Diamond hands: Being strong enough to hold a stock as it rises and falls until the opportune time to sell.
- Paper hands: Being too weak and selling before the stock spikes.
- To the moon/Mars/elsewhere in space: The sharp rise of a stock during the spike (squeeze), which will send prices "to the moon." Typically represented by rocket ships emojis.
At its core, WSB is a bunch of stock traders who post their losses and gains. Many posts are about going "YOLO," or "all-in" on a stock. Self-deprecation is encouraged and celebrated. There also are some really smart people who do their due diligence.
They Want Nothing Less Than the Greatest Transfer of Wealth in the History of the World
WallStreetBets used to just be a mass of people on Reddit who traded stocks.
Now they have gotten the attention of the rich and powerful.
The Message Is Clear for Wall Street
Beware of the 99 percent. Anyone can be an investor today. The barriers to entry are lower than they have ever been. And everyday people are taking advantage of that opportunity.
This GameStop stock saga has exposed the unhappiness and frustration many people have with the institution of Wall Street.
They are using this moment to turn the tables on traditional investors.
GameStop Stock's Explosion Over Six Days
GameStop was worth $4 in July 2020.
Fast-forward six months to 2021, and over the course of five days, GameStop's stock went from $40 on Jan. 21 to a peak of $468 on Jan. 28.
That's Not Chump Change
On Jan. 25, GameStop was the most traded stock in the entire world on Jan. 25.
All of a sudden, hedge funds weren't just having a bad day or two.
They were worried about being financially ruined.
It All (Mostly) Began With One Redditor
Around Q4 2019, a Reddit user named DeepF---ingValue (DFV) posted to WallStreetBets an investment of $53,000 in GameStop. DFV's investment strategy lines up with Michael Burry's, who urged Gamestop to buy back its shares at the then-$4-a-share price in August 2019.
Burry is the man who famously shorted the subprime mortgage industry that caused the Great Recession and made $750 million for his investors and took home $100 million himself. He is a central character in 2015's "The Big Short."
A bit over a year later, Burry called the WSB rally "unnatural, insane and dangerous." As of this writing, DFV now has nearly $40 million in GameStop stock.
OK, But Why Did They Invest?
Here's the simplified version. Melvin Capital Management is a hedge fund that, as of early January 2021, managed $12.5 billion in assets. Melvin made lots of its money on buying shorts. Meaning, they bet against companies by buying shorts. One of those companies was GameStop. And they bet big that the aging gaming company would fail.
Melvin was not the only company doing this, but they were one of the biggest, which is why they get mentioned. Someone found out about it. It's credited to DFV, who laid out his reasoning in YouTube streams beginning in August 2020.
WallStreetBets vs. Hedge Fund Managers
This caused a growing swell of people looking to buy stock in GameStop. The more people bought, the more it drove up the price.
Because Melvin and other hedge funds that shorted the company would, eventually, have to buy back the price at astronomical prices.
The stage was set for an epic battle between WallStreetBets and hedge fund managers.
What Is a Short?
If you're confused about shorts, read on. If you know what they are, skip to the next bit.
The thing is, short sellers don't actually buy stock, at least, not as first. They borrow it from a broker, then turn around and sell it to someone else. They will have to buy the stock back. The short seller pays the price of whatever the stock is when they buy it back (cover their call).
Let's say one stock of GameStop is worth $10. A short seller borrows it for $10 and sells it to someone else. If the stock goes down to $9, then the short-seller buys the stock back and makes $1.
However, if the stock goes up to $11, the short seller owes $1. If it goes to $20, the short seller owes $10, and so forth and so on. At some point, the short seller has to buy back the stock.
Hey, Wait a Minute, Those Privileges Weren't Meant for You
The thing with short selling is that there is, theoretically, an infinite amount of money a short seller can lose. That's why short selling is risky.
As short sellers get squeezed out, new (or even the same) short sellers buy in, creating more demand. All of this is common among massive hedge funds that move billions of dollars. In this case, they lost billions.
GameStop was massively shorted, to 139.57 percent of its float.
What's a Float?
A company's float is the number of available stocks to be publicly traded. It doesn't count restricted shares, which are held by the company's insiders.
GameStop has a float of about 50 million. As of the latest data, GameStop had a short float of about 140 percent.
How could GameStop possibly be shorted for more shares than it has? Some say it's because of naked shorts.
What Is Naked Shorting?
Naked shorting is the selling of shares that do not exist. Meaning a broker is selling shares they don't have to short sellers.
Sounds messed up, doesn't it? Well, it is! It was also made illegal after the 2008 financial crisis because it helped crash the market.
Because we're so in the thick of this and the dust hasn't settled, it's not entirely clear if that's what's happening here, or if there is something else at play that is obscuring how many shares are really out there. But naked shorting can be one of those reasons.
You Can't Count Your Money If You Don't Have Any Money
Eventually, the short sellers have to buy back their stock.
The brokers who lent them their shares can demand them back, and increase buying pressure.
When the cover happens, it creates a squeeze, rocketing the price.
What's a Squeeze?
A squeeze happens when there is a lot of demand for a stock but not enough shares.
When short sellers buy back their shares in massive amounts, this creates an even higher demand (because now the stock is being bought again), which rockets up stock prices. When the big squeeze is finished, prices plummet.
Those who are lucky sell at the right time and make bank. Others are left with massive losses (aka they're left holding the bag, as WSB would say).
An Example of a Big Squeeze
The biggest squeeze in history occurred to Volkswagen stock in October 2008. Here's what happened:
- In March 2008, Porsche owned 31 percent of Volkswagen, and Lower Saxony owned 20 percent.
- Porsche then increased its stake to 43 percent and also took 31 percent in stock options, which gave them the right to buy or sell shares at a later date.
- That meant Porsche owned 74 percent of Volkswagen.
- Thirteen percent of Volkswagen's stock was shorted already.
- Another 6 percent was in an index fund.
- Add it all up and by October 2008, all shareholders combined "owned" 107 percent of Volkswagen.
Those short sellers found themselves completely screwed because Volkswagen and Lower Saxony were not going to sell their shares. But the short sellers needed shares to buy so they could give them to their broker. They caused so much demand and activity that Volkswagen's stock shot from 200 euros ($242) to 1,000 euros ($1,210) before returning to earth.
Many WSBers are calling for people not to sell until GME hits $1,000. They got that number from this squeeze.
Melvin Lost So Much Money It Needed a Bailout
As of the time of this writing, short sellers lost over $5 billion because of people betting on Gamestop.
Melvin itself received a $2.75 billion bailout from Point72 and Citadel on Jan. 26 to help them cover its short positions.
At that time, Melvin was down 30 percent.
Robinhood Made it Easier to Buy Stock
Many young traders entered the stock trading game because of Robinhood.
Robinhood is a trading app that allows investors to trade very fast, with zero commissions or fees. It also allows users to have instant funds by fronting users cash when they deposit funds from their bank, which typically can take up to three days. The speed and ease of use made it extremely popular.
Robinhood launched in 2013 and had over 13 million users in 2020.
Robinhood Blocked Buying GameStop
Traders woke up to brutal news on the morning of Jan. 28.
Robinhood and TD Ameritrade restricted trading GameStop. Robinhood also blocked the purchase of stock in Blackberry, AMC, Naked Brand and Nokia, all of which were also experiencing high trading volume.
It was an unprecedented move and has drawn widespread backlash on Twitter. The app currently has a one-star rating on Google Play.
WallStreetBets Is Not Just About Making Money
The thing with WallStreetBets is that it is full of people who see hedge funds as the enemy. They're mad at them for using their massive amount of capital to move markets in their favor and jaded by the federal bailouts they received in 2008, at a time when the little guy was left stranded.
This is important because these guys are out for blood. They don't just want to make money. They're willing to take the risk and hold their stock until these short sellers bleed out trying to cover their calls.
'This Is Personal'
"This is personal. For all of us," wrote Reddit user benaffleks. "This is a big moment. A tug of war between tradition and the future. Hedge fund managers live in the past, and continue to look down upon the retail investors. They truly believe that we, the average retail investors, don't know anything about finances or the market (which may be true), and we're just gambling our money away.
"We don't know any better. WE NEED HEDGE FUND MANAGERS TO TELL US WHAT TO DO! SAVE US!
"This is the world they want to live in. This was the past.
"Remember that scene from the Sopranos, where Tony's wife calls to buy 5000 shares of Webonics, after she was manipulated emotionally to do so? Institutions and hedge funds want us to be stuck in that world.
"They're scared of the future.
"They're scared because, so much information is available for free now. There's no more fees for trading. We have large communities that discuss stocks and trading openly.
"We can think and make decisions for ourselves, which scares the F*** out of old school institutions and hedge funds.
"F*** them all. This affects every single one of you, whether or not you're holding $GME."
The Media vs. WallStreetBets
The other thing that WallStreetBets is at odds with is the media. They believe outlets like CNBC are in the pockets of hedge funders and are painting their community as market manipulators.
It's surprisingly similar to the runup to the 2016 election (and its aftermath), with people decrying mainstream sources as being fake news.
Just without the politics involved.
When Do the Short Sellers Buy Out?
Melvin says it closed out all of its short positions on Jan. 26, as reported by CNBC the following morning.
But WallStreetBet users called this fake news. saying that CNBC did not directly quote or name the source and pointed to previous times where Melvin has stated that it does not comment on its positions.
Many users pointed to the fintech company, S3 Partners, which tweeted that there were still millions of outstanding shares on Jan. 27.
There's no way to really tell until it's all over. Traders made #DoNotSell trend on Twitter on Jan. 28.
Elon Musk Drove Prices Through the Roof
Eight minutes after the markets closed on Jan. 26, Elon Musk tweeted "Gamestonk!!" with a link to wallstreetbets.
That tweet drove the price from a close of $148 to over $200 during after-hours trading.
Mark Cuban Questioned Robinhood's Decision
Robinhood drew not just the collective ire of WallStreetBets' millions of users, it also received some negative attention from very prominent people.
Mark Cuban questioned the app's decision to stop trading certain stocks, speculating that Robinhood might be losing money or is too weak to cover the trades at such an enormous scale.
More Industry Titans Jump on Board the GameStop Train
Chamath Palihapitiya, a 44-year-old billionaire venture capitalist, jumped on the GameStop train as well. He bought in $125,000 worth of call options and cashed them out for over $500,000 and donated the proceeds to the Barstool Fund, which supports struggling small businesses affected by the pandemic.
"I think what you're seeing is essentially a push back against the establishment in a really important way," Palihapitiya told CNBC. "A lot of people who believe that, coming out of 2008, what happened was that Wall Street took an enormous amount of risk and left retailers as the bag holders. A lot of these kids, who were in grade school and high school when this happened, their parents lost their homes, lost their jobs. They wondered, 'Why did those folks get bailed out for taking enormous amounts of risks, and nobody showed up to help my family?'"
You can listen to more of Palihapitiya's thoughtful interview.
The SEC Is Monitoring GameStop
The Securities and Exchange Commission said it was "actively monitoring" GameStop stock and other volatile stock in a statement on Jan. 27.
Whatever happens in the aftermath of this wild ride, it's going to be one for the history books.
They Like the Stock
Speaking on CNBC, Jim Cramer seemingly took WallStreetBets' side when other analysts accused the forum of manipulating the stock. Cramer countered by saying it was just a bunch of disparate people buying a single stock.
"They like the stock," he said.
"They like the stock" became the rallying cry of WSB.
WallStreetBets Momentarily Went Down, Discord Channel Gone Permanently
WallStreetBets went private on the night of Jan. 27. It caused a momentarily tumble in GameStop's stock. But the subreddit was back up within a few hours. The moderators had to do some cleanup work banning bots and removing posts.
The WallStreetBets Discord channel was not so lucky. It was flooded with users and became an incoherent mess of constant chatter, and Discord banned it for hate speech.
Some People on Reddit Bet Very Small
We're selecting a few posts from Reddit to give you an insider view of what's happening in that community. While we checked these profiles to see if their posting history is legit (that they weren't bots or spammers), these are still anonymous users.
While the biggest gainers are those who had thousands to play with and got in early, other people took what little they had and tossed it into GameStop. Because if you're so poor you have nothing to lose, why the hell not?
"Poor as dirt, $40 in my account after paying rent, you boys are helping me put food on the table this week," wrote Reddit user senorradio.
"I don't have any super crazy gains like some of you guys. I'm living paycheck to paycheck and was left with $40 in my account after paying my bills for this month. I was worried about what I was gonna do this week, as my pantry was empty. I took a bet on you guys and dumped it all into $GME and was only able to get half a share, but I managed to turn it into $200 and was able to treat myself with some name brands at the store. I haven't had this much to eat in a while. Thank you. I appreciate you all."
'You Are Over Here Changing Lives'
Some people made enough money that it changed their lives.
"I just want to let you guys know what you are doing is changing lives in the real world," wrote Reddit user garakplain. "I am an actor and my wife is a social worker and COVID hit us hard.... To add to this a few months back both our cats got cancer at the same time, it has been a struggle managing vet visits and bills (We have spent at least $5k by now).
"I have been lurking on this sub for a while and figuring out how it all works and what you guys have recently done is nothing short of amazing — leveling the field in this unjust world. This morning we bought a few shares of GameStop with what we could afford, and you all helped pay for our cats and one-day cancer treatment. We didn't have much to put in and only the belief in your movement made us take the small plunge. You have no idea what this means to us.
"You are over here changing lives when there was no help or hope. You gave us hope. Please keep going — in our small way we are with you. This brings back faith in humanity and hat we can achieve together."
'Keep Away From Billionaires'
Many people held the us-against-them sentiment.
"A friend of mine asked me what the deal was with GME, ELI5 style," wrote Reddit user deliciousmonster (ELI5 means "explain like I'm five").
"So I told him: A big investor bet that a stock would go down, and they orchestrated giant sales in order to make it so.
"It was so profitable that they sold more stock than was even available, which is super greedy, but not unusual. But we found out....And now, they're super pissed because we're playing keep-away with the stock they HAVE to buy. And we're using Reddit to warn each other about the shady bulk sales and scare tactics they'd normally use to get us to sell.
"So as long as we stick together, they're going to keep losing money, and the price they pay keeps going up. There is no limit to how much money they can lose if we all agree not to sell. So now they're going on TV and using words like 'collusion' and 'fraud' to justify some legal intervention because we're doing to them what they normally do to us.
"TL;DR: We're playing keep-away against the billionaires, and Reddit is allowing us to win."
'I Can Now Put My Sister Through Lyme Treatment'
One user, Stammbomb, posted to WallStreetBets a chart showing over $64,000 in funds made from trading GameStop on Robinhood.
"I can now write my mom a check and put my sister through Lymes treatment. This has been a very rough year, but I'm so thankful to every single one of you."
'If It All Works Out, I'll Help a Few Families Get Their Life Back on Track'
Some users said they would help others out if everything went according to plan.
"Some of my relatives lost their livelihood because of the pandemic. Some didn't make it at all," wrote Reddit user Baelthor_septus. "My friend's husband passed away due to COVID, she lost her job and now she's alone with two kids and swimming in debt.
"I've tried to help everyone as much as possible but it just wasn't enough. My own business died during the lockdown as well but I was able to save up some cash.
"Most of it is now in GME. I've bought shares for [$]20k at [$]120 average. If this rocket will fly over $1,000 I'll be able to help these families get back on their feet (and the kids will be able to go back to dancing classes!).
"Listen ... I just wanted to let you know that by doing your part and holding, you're not just helping the whales get more yachts and mansions but you're also saving lives. Literally. Thank you for giving me an opportunity to do some good."
A Class-Action Lawsuit Against Robinhood is Forthcoming
Several Reddit threads emerged on WallStreetBets on Jan. 28 with users saying they plan to sue Robinhood in a class-action lawsuit.
"What kind of trading app doesn't let you buy?" asked user Tigaj.
According to Fox Business Network producer Lydia Moynihan, one has already been filed in New York.
Conspiracies About Why Robinhood Stopped Trading Are Rising
People on Twitter and Reddit are speculating on why Robinhood stopped trading.
A popular theory on Reddit is that Citadel made the move so it could stop people from making it lose money.
Citadel bailed out Melvin and is also a big investor in Robinhood.
The Plot Thickens After Robinhood's Statement
That wasn't the end of it. According to CNET, Robinhood on Jan. 28 sent an email to customers saying it would allow "limited buys" of GameStop starting Jan. 29. The decision was made because of U.S. Securities and Exchange Commission regulations.
Robinhood CEO Vlad Tenev then went on CNBC and gave an explanation why the investment app decided to restrict users from purchasing shares of GameStop, AMC and other companies.
"In order to protect the firm and protect our customers, we had to limit buying in these stocks," said Tenev, who denied the company had any liquidity issues.
This Is Not Your Father's or Your Grandfather's Economy
A Twitter user named @Crasta_7 raised three interesting points about the state of the global economy.
1. Over 10 million new brokerage accounts were opened in the last year.
2. Retail investors are now in a position to sway the market more than ever.
3. The economy is one meme from a subreddit to collapse.
Ants Are Everywhere
People have recognized some similarities to the Occupy movement that started in 2011 and ended in 2012.
It was a protest against Wall Street and the greed and corruption of the 1 percent.
There is similar energy with the Reddit vs. Wall Street battle.
When Will It Stop?
Experts say GameStop's stock can't keep going up. The Reddit investors are committed to keep going until they win.
It could be a very short event with a small window for people to buy when the time is right, if the predictions are true.
If or when the big squeeze occurs, there will be a lot of people who made money off of this event, and a lot of people who lost.
Get Ready for the Ripple Effect
This GameStop rebellion is bigger than GameStop and Wall Street.
It could have major implications on the global financial system.
Stay Tuned and Grab Your Popcorn
Whatever happens, the Gamestop trade war is big. It will be talked about in business school classes and history books one day. Don't be surprised if it's turned into a movie, too.
Billionaires and huge hedge funds don't get hurt by individual investors every day.
You can stay up to date on all the news at WallStreetBets.