In late January 2021, a group of Redditors began buying up shares of GameStop that they believed were undervalued to drive up the stock price, in order to force the establishment investors to abandon bearish bets against struggling companies such as GameStop.
This subreddit-driven investment mania caught many by surprise, including those on Wall Street who had bet against GameStop and other so-called meme stocks. As the prices of these stocks surged, the establishment investors were forced to abandon their bearish bets and take heavy losses. The Redditors behind this investment mania have been hailed as heroes by some, while others have criticized them for driving up stock prices to unsustainable levels.
What is a hedge fund?
A hedge fund is an investment vehicle that pool together money from wealthy investors and use it to buy assets such as stocks, bonds, and other securities. Hedge funds are typically managed by professional money managers who charge high fees for their services.
The main goal of hedge funds is to generate returns for their investors, regardless of whether the overall market is going up or down. To achieve this, hedge funds often use aggressive investment strategies such as short selling and leverage.
What is short selling?
Short selling is a type of investment strategy where an investor sells a security they do not own and hope to buy it back at a lower price so they can profit from the difference.
For example, let’s say an investor believes that the stock price of Company XYZ is going to fall in the near future. The investor could borrow shares of Company XYZ from another investor and sell them at the current market price. If the stock price does indeed fall, the investor would then buy back the shares at the lower price and return them to the original owner. The difference between the prices at which the shares were sold and bought would be the investor’s profit.
What is leverage?
Leverage is a type of investment strategy where an investor borrowing money to increase their potential returns. For example, an investor could borrow $100 to buy $200 worth of shares in a company. If the value of the shares goes up by 10%, the investor would then own $220 worth of shares (10% x $200 + $100). The extra $20 is the profit that the investor made thanks to the leverage.
Leverage can magnify both profits and losses. If the value of the shares had gone down by 10% instead of up, the investor would have lost $20 (10% x $200 + $100).
What happened with GameStop?
In late January 2021, a group of Redditors began buying up shares of GameStop that they believed were undervalued to drive up the stock price, in order to force the establishment investors to abandon bearish bets against struggling companies such as GameStop.
This subreddit-driven investment mania caught many by surprise, including those on Wall Street who had bet against GameStop and other so-called meme stocks. As the prices of these stocks surged, the establishment investors were forced to abandon their bearish bets and take heavy losses.
The Redditors behind this investment mania have been hailed as heroes by some, while others have criticized them for driving up stock prices to unsustainable levels.
What happens next?
It remains to be seen what will happen next with GameStop and other meme stocks. Some believe that this is just a bubble that will eventually burst, while others see it as a sign of a bigger shift in the power dynamic between everyday investors and establishment investors.
Regardless of what happens next, one thing is for sure: the Redditors have upended the status quo and shown the world that they are a force to be reckoned with.
