The stock market is like nature, unpredictable. Here anything can happen at any moment. This has clearly been proved by the events that recently took place in America’s world of the market world. A historical event that has left the entire Wall Street trembling has attracted global attention, especially because it soon spiraled into a people’s movement. It all started with the massive rise in share prices of an American high street shop named GameStop that sells games and other electronic devices.
Here is what happened:
Due to the pandemic lockdown, GameStop just like the other stores across the world wasn’t doing well and running into losses. Many Hedge funds put a bet that the share price of GameStop would see a sharp drop. Nevertheless, swarms of people ended up purchasing the shares of the store since the share price of it was low. This led to a rise in demand for the store’s stock resulting in the rise of the share price. Since this did not work well for the hedge funds, the platform where people could buy the stock of GameStop froze the purchase of the shares infuriating the masses.
How did this happen?
To truly understand why this is a big deal, there are 3 key participants in this event you need to know about
For all those who haven’t heard of Reddit previously, it is a social networking platform consisting of different types of groups/forums with participants sharing similar interests. There are groups that talk about history, places of the world, football, health, etc. One such group was the ‘Wallstreetbets’ which is about stocks and trading. This group has around 4 million participants who discuss and share news about the stock market.
It was through Reddit that investors became aware of the availability of GameStop’s shares at a lower price. This directed all the investors in purchasing its shares thereby increasing its demand and price.
Robinhood is a popular online broker, a platform where people/investors purchase and sell shares of various companies commission-free. Robinhood is known for “democratizing finance for all.”, a recognition that now might have got tarnished. When the share prices of GameStop rose, Robinhood froze the new purchase of these shares along with the shares of some other companies which includes AMC Entertainment, Blackberry, and Nokia.
Why did Robinhood do that?
In its clarification, the company released an official statement saying “the company “makes changes where necessary” in light of market volatility.”
The investors however have alleged that the company was merely protecting the interests of the Wall Street Hegde funds who are currently facing huge losses due to the rise in the stock price of GameStop. Many retail investors have filed lawsuits against Robinhood for the same and are seeking class-action status. They claim that this decision of Robinhood has caused the loss of millions of dollars of investors.
Robinhood, however, wasn’t the only one to freeze the stock of GameStop. Other online brokers like Interactive Brokers and E-Trade too froze the stocks.
They are investment firms that exercise such bettings over the rise or fall of the stock prices of companies. One such Hedge fund named Melvin Capital Management, a top performing firm on Wall Street was betting on the fall of the stock prices and aimed to make huge profits from it. However, as the stock price of GameStop rose drastically, Melvin Capital was hit hard by this, losing 15% of its total value.
Now, why has this created a frenzy all over?
While some found this whole event funny considering that a small retail store rose to immense recognition, the stock market and trading enthusiasts claim that this has never happened in history ever and is the first of its kind.
Professionals have called it ‘insane’, ‘shocking’ and ‘nothing like they have ever seen.’ Moreover, the man who has the world’s attention, Tesla’s CEO, Elon Musk too tweeted about it and that too in just a single word, “Gamestonk” which pulled the attention of millions, thereby raising the stock price of GameStop even more.
Some also call it the revenge that was long due.