Anne Marie Waters
Tuesday 9th February 2021
In recent weeks, an odd occurrence took place on the stock market. It has caused a significant shift in the attitudes of many big companies and has been hailed as a victory for the ‘little guy’.
I’ll outline exactly what happened.
GameStop is a video game retail chain. It is a US company with outlets across America, Canada, Australia and Europe. The COVID-19 lockdowns in these countries has hit GameStop’s fortunes hard.
Meanwhile, on a social media site called Reddit, online groups with similar interests are created. One such group is called wallstreetbets. This group has 4 million members who discuss stocks and shares and investments on Wall Street. Wall Street is a district in New York City which is a financial hub, and where the physical financial and stock markets are based.
On the stock market, there is a process known as ‘short-selling’. What this means is that people can acquire the shares of a company that they think is going to fail. They then sell these on with a promise to buy them back at a later date. When they buy them back, if (as they are gambling on), the price of the shares has fallen, they will have made a profit.
The BBC describes it like this:
Imagine you borrow some Pokemon cards from a mate, because you think the price of them is about to drop, and agree to give them back in a month.
Then you sell them to someone else for £5 per pack.
You work on the assumption that you’ll be paying less than a fiver for them after a month when they’re not so new and exciting anymore. Let’s say you buy them back for £3.
Congratulations, you’ve made £2!
This is a massively simplified explanation of something called shorting, or short selling.
Think of it as gambling. If your bet was wrong and the price actually rises instead of falling, you’d lose money.
With this in mind, the Reddit group decided to buy shares in GameStop and therefore raised the price of the shares. When a company has this much interest, the stock market assumes it is going to do well and the price of shares goes up. The result was the loss of vast sums of money for the short-sellers; in this case a group including multi billion dollar hedge fund Melvin Capital.
A hedge fund, in simple terms, is a private partnership, headed by a head fund manager, that invests in the stock market with a view to making as much money as possible. It engages in just such behaviours as outlined above. Investopedia describes it like this:
Hedge funds are financial partnerships that use pooled funds and employ different strategies to earn active returns for their investors.
So in summary, the rich hedge funds had made a gamble that GameStop was going to fall, and acted accordingly. However, users on Reddit stepped in and invested, raising the share price resulting in massive losses for the hedge funds!
For days, the media was awash with stories covering this. According to the Independent, this was the first time that “ordinary investors have had the clout to cause a large fund such hefty losses”.
The Guardian pitched it as a battle between Wall Street and small investors, and quoted one such investor as stating on Reddit: “We’re literally more powerful than the big firms right now.”
So what is the significance, beyond a victory for David over Goliath? According to some, a changing attitude on Wall Street.
One short-seller that got burned has already announced a wholesale shift in approach. Citron Research has said it will now focus on investing in companies with potential to grow rather than betting against those it thinks have major problems. Other funds have cut their short positions too.
Institutional investors, including hedge funds, will have to increasingly do their research into sentiment expressed online in forums like Reddit and factor this into some of their decisions.
It’s rare that the uber-rich and powerful are forced to re-examine their positions, and this is one such example. I could compare it to our political will. Sometimes with the collective determination of those on the outside, it is more than possible to force change on the inside.
Given the vast upheaval in our society, political change is inevitable. For Britain is a group, a collection of people, and we’re determined to break in to the chambers of the political elite. Not with the ambition to change those who are there, but to change the make-up of the chambers from them to us.
It can be done.
Anne Marie Waters
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