If you have been following the stock market over the last few weeks, you have probably heard of the craziness around these stock names:
-Bed Bath and Beyond
And many others…
But if you are wondering what is going on, I will attempt to give you a 30,000-foot view of the situation.
And trust me, it is fascinating.
The Ruling Class is the Target
Whether it is election interference, the banking system, or what feels like unfair capitalism at the hand of the 1% - it seems as though those at the bottom are fed up.
It seemingly started on Reddit.
A group of individuals took notice of how a few hedge funds were manipulating the market in their favor.
They were doing this by shorting the stocks of certain companies.
When you short a company, you are betting on the stock price to drop.
In the case of GameStop, they had shorted 130% of the shares the company had available.
How is that even legal?
That is exactly what these individuals on Reddit were wondering
These hedge funds short these companies, which drives their price down, and in the end, they make a big profit doing it.
This is at the detriment of the company and its investors.
How this Reddit Group Responded
With a bad taste in their mouth for what they saw back in the financial crisis of 2008, these groups wanted to send a message to Wall Street.
What was the message?
We are tired of you rigging the game in your favor and we have had enough.
What they did next really put a hurt on these hedge funds.
Knowing that they were heavily exposed in shorting these companies, they started buying the stock.
Not only them, but many others.
Eventually the cause went viral – hence why you may have heard the chatter.
When lots of people buy a stock, this drives the price of the stock up.
This is where the hedge funds come into play.
When you short a stock, you are promising to deliver that stock- that you do not currently own – to a buyer at a later date.
Seeing the price of the stock rising quickly, they then had to start covering their short positions.
This is called a short squeeze.
Remember, they had shorted 130% of the stock the company even had available – which means they had to buy a lot of stock.
Once that happened it drove GameStop to the moon.
Before this all took place, the stock was at $20 share.
As of yesterday, the stock had reached a high of $483.
Talk about putting the hurt on these hedge funds.
When they short a stock at $20, they are promising to buy it later – maybe as high as $483 – and deliver it to someone for $20.
That is a loss of $463 per share.
Some of these funds where rumored to be taking a 13-BILLION-dollar loss because of this.
They are not Stopping at GameStop
This movement has caught hold and is moving to many other names.
They are even taking aim at commodities.
Basically, anywhere these hedge funds have been heavily shorting, they are targeting.
They consider it their own form of ‘redistribution of wealth.’
This very much feels like David versus Goliath, and David seems to be winning.
Many of the comments on these Reddit boards are individuals who had their finances decimated in the Great Recession.
That bad taste has not left their mouths.
One of the arguments against capitalism is that this type of behavior is condoned from hedge funds and other financial institutions who game the system.
But the truth is that it has nothing to do with capitalism.
Much of this is because of government’s involvement in capitalism.
When companies know they will be bailed out - or protected - from their bad behavior, they often act unscrupulously.
Anyone who says this is a sign that capitalism doesn’t work is not being intellectually honest.
What we are seeing is going to be something we sill study for years to come.
It will be interesting to see which party the regulators try to go after for this market manipulation - the Reddit crowd or the financial institutions.
Whither it is cryptocurrency, or the financial revolutionaries on Reddit, one thing is for certain and it’s that the little guy is growing tired of those ruling the system.
I am not proposing to run out and by these stocks, nor am I condoning or condemning what we are seeing, but understanding what is happening is important.
We are starting to see decentralization in the financial markets.
We are seeing history in the making.
Maybe, just maybe, we will come out the other side with the financial world on a more level playing field.
The power seems to be shifting to the people.
The only question that remains is can they hold on.
Founder of 1911 Apparel
This is not financial advice. Contact a licensed mortgage professional in your area to see what makes sense for your unique situation.