[ad_1]
(CNN Business) – There was a lot to break in this week’s flood of news on GameStop, the stock market, Reddit groups, trading apps, and hedge funds. If this all sounds like a lot, we can’t fault you for understanding what is going on.
While we don’t know how Reddit’s so-called rebellion will change the future of investing, it’s safe to say Wall Street will never be the same again.
Here are five important things you need to know about a crazy week on Wall Street:
1. This is the story of David v. Goliath
At the heart of the GameStop saga is a struggle between two completely different groups of investors: a group of amateur day traders against a group of Wall Street professionals known as short sellers.
In this case, David are the little merchants who congregate on the Reddit page, aka Reddit Army, or Reddit Community, depending on your point of view.
“They have seen the rich get very rich by taking advantage of the cheap money, and they also want their share,” said Richard Fisher, the former chairman of the Federal Reserve in Dallas.
Their mission has two main purposes: to raise the stock price to make a profit for themselves, and at the same time, to force institutional investors to abandon bearish bets against struggling companies, such as GameStop, AMC, Macy’s and many more. others.
Goliath here, it’s mostly hedge funds that are short selling these stocks – in other words, the big investors are betting that these stocks are going to crash. They are also the Wall Street elite that millions of investors rely on to make smart decisions to boost their portfolios. But working in an industry tied to the House of Cards system that led to the 2008 financial crisis makes these giants unsympathetic. The publications of the Wall Street Betting branch appreciate seeing short sellers losing billions of dollars.
2. How the Games Rally started
The Wall Street betting community, which now has around 5 million followers, has been around since 2012. Describing itself as if “4Chan has found Bloomberg,” the forum’s alien nihilism, mysterious language and pungent memes have sparked a war against the mainstream perceived.
The group noted that GameStop, the video game retailer, is sorely lacking in hedge funds. (The consensus on Wall Street seems to be that the company is going to go bankrupt soon.)
Reddit investors took a different view of short sellers and started buying shares in the company they felt were undervalued.
3. Why did the explosion occur?
Although it was taking shape some time ago, the rally took off on Monday, January 11, when GameStop announced that three new directors would be joining its board, including Chewy co-founder Ryan Cohen. Investors have appreciated that Cohen brings the digital experience to the table, something GameStop desperately needs as video games go digital and malls continue to decline.
GameStop’s stock rose just under 13% that day. But it was no ordinary hike. Two days later it went up 57%, then 27% … and so on. The Reddit crowd has also led to massive leaps in AMC, BlackBerry, Macy’s, and other major selling actions.
On Friday, GameStop action is up 1,587% since early January.
And a year ago, the cost per share was around $ 4. It’s now around $ 150.
The increase ultimately had little to no relation to GameStop’s power as a business. Ever since investors who follow the Reddit Group bought a lot of GameStop shares, short-term sellers have had to buy shares to cover their losing bids – pushing the share price even higher. This is called short buying.
Millions of people participated, including Elon Musk.
It quickly became a “populist uprising armed with toll-free brokerage accounts,” CNN’s Kristin Romans said. The only “seasoned” players are Wall Street.
4. Robinhoud’s reverse attack
GameStop shares were traded the most on Tuesday, and then Robinhood’s app broke the party.
On Thursday morning, due to extreme volatility, the free trading app, loved by millions of amateur investors, suspended trading. This left the Wall Street betting crowd with only two options: hold or sell stocks. Meanwhile, institutional investors, who did not need a robinhoud to execute trades, were able to continue.
GameStop shares lost more than 44% of their value on Thursday after jumping nearly 40% earlier today.
The reaction was swift. Those who were withdrawing money from GameStop were, to say the least, angry.
A consensus emerged on social media that Robinhood, which had built its brand on the “democratization” of investment, seemed to succumb to pressure from powerful Wall Street institutions.
Congresswoman Alexandria Ocasio-Cortez called the decision “unacceptable”. A Reddit user quickly filed a class action lawsuit claiming Robinhud rigged the market against his customers.
Robinhoud sold on Thursday evening, saying he would resume the “limited” purchase of shares the next day. It also received $ 1 billion in cash from its private investors, indicating a lack of cash.
5. The bubbles will burst … eventually
There is a perception that GameStop was undervalued, but hardly anyone thinks that BlackBerry, Macy’s, AMC, or any of the other publicly promoted companies on Reddit have the foundations to support such high prices. At some point, reality will begin.
But that’s the problem with bubbles – get out early and you’ll miss the chance to get paid at the top. So GameStop keeps going up … until it doesn’t.
“Someone is going to get hurt. As it happens with crowd behavior, you end up getting people to come in at the very end at a really high price and get burned,” said Richard Fisher, former president of the Federal Reserve in Dallas.
The Securities and Exchange Commission, the agency that regulates Wall Street, has said it will take a close look at measures taken by trading platforms to restrict trading.
Source link
