(RepublicanDaily.org) – The stock market has dominated headlines for the last week or so. When Reddit users sought to profit from short selling by hedge funds by buying up stocks, certain companies saw their share values explode. However, this spike was based on pure speculation; as buyers exited their positions, prices crashed again.
GameStop, the company with which this trend began, is a good example. Having closed at over $300 twice last week, the stock was trading at around $50 on Friday, February 5.
Let’s look a little closer at what went on with GameStop’s stock price, and what’s likely to happen going forward.
What Is Short Selling?
A short sale is essentially a bet against a certain stock. Put simply, a short seller borrows shares of a stock and sells them. Hoping the price will go down, they agree to return the borrowed shares at a certain date in the future, with the price difference being their profit or loss.
This is what hedge funds did with GameStop stock. Had ordinary market conditions persisted, they could well have profited from the move. However, the short squeeze engineered by the subreddit r/WallStreetBets ended up costing them billions of dollars.
What Is a Short Squeeze?
A short squeeze occurs when the price of a shorted stock increases rapidly. This forces short sellers to buy the stock to offset their losses, thereby magnifying the price increase.
Reddit users did this with GameStop by simply buying up shares of the company. Increasing demand means increasing prices. The more investors got on board, the higher the price climbed, and the greater the damage to hedge fund positions.
What Happens Now?
The SEC is currently investigating what happened with GameStop. There are suspicions that professional investors may have fraudulently manipulated social media forums by pretending to be ordinary platform users.
Wealth management is not an inherently “bad” industry. People with cash to invest should have the opportunity to do so productively, and companies seeking to access capital should be able to get it through the market.
That said, it’s impossible to deny the fact the hedge fund section of the industry adds little real value to the economy, especially in the context of the massive wealth it creates. The r/WallStreetBets saga might signal the beginning of a more mutually-beneficial relationship between financial markets and ordinary people.
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