Your guide to the Gamestop stock

David Duggan, Managing Editor

Wall Street Bets, the Reddit page behind the meteoric rise in GameStop stock, encouraged participants on the forum to invest in GME. This was in response to Hedge Funds who had shorted the stock. The higher the demand is for the stock, the higher the price of the stock.

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Shorting a stock is making a bet the price of it will go down. A fund, with the belief the price of a stock will go down, borrows that stock from someone else. The fund that now holds the stock quickly sells it. Since the stock was only borrowed, they have to eventually give back the stock. The goal is for the fund to purchase the previously sold stock at a much lower price, give it back to the owner, and the fund gets to keep the positive difference.

The sudden rise in GameStop stock prompted certain Hedge Funds to quickly purchase shares before the price per share went even higher. As Hedge Funds purchased GME stock, this caused the share prices to increase even more- something called a “short squeeze”

Redditors were soon encouraged by Elon Musk, who tweeted “Gamestonks!!!” while linking the Reddit page. This further generated hyped for purchasing shares.

For reference on how drastic the rise in stock price is, in April 2020, a share stood at $2.57. On January 28th, 2021, a single share of stock was $483.00.

CNBC reported that Melvin Capital, one of the funds who shorted the stock had “closed out its short position in GameStop on Tuesday afternoon after taking a huge loss.”

“CNBC could not confirm the amount of losses Melvin Capital took on the short position. Citadel and Point72 have infused close to $3 billion into Gabe Plotkin’s hedge fund [Melvin Capital] to shore up its finances.”

In response to the increase in stock, select brokerage firms such as Robinhood began to prevent the purchase of the GME, instead only allowing users to sell the stock.

In a statement, Robinhood said, “ In light of the extraordinary market conditions this week, we temporarily limited buying for certain securities this morning.” “ As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be subnational in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.”

GME holders began to express their frustrations.

One Twitter user wrote, “remember when senators got coronavirus briefings before the public and sold off millions of dollars in stocks before the crash last year and face no consequences and no regulation? Then Reddit made one stock into a meme and they’re talking about restructuring the whole market”

Rapper Ja Rule tweeted, “Yo this is a fucking CRIME what @RobinhoodApp is doing DO NOT SELL!!! HOLD THE LINE… WTF” and went on to be interviewed by CNBC Market Alert.

Justin Kan, the founder of twitch, tweeted, “Just got a tip that Citadel reloaded their shorts before they told RobinHood to stop trading $GME. If this is true, Ken Griffin and the Robinhood founders should be in jail. This is class warfare.”

A class-action lawsuit has already been filed in New York which claims, “Robinhood purposefully willfully, and knowingly removing the stock ‘GME’ from its trading platform in the midst of unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the stock market.”

On Wednesday, The White House Press Secretary announced they were “monitoring the situation”

Lawmakers have shown a rare bipartisan interest in pursuing a response to what is happening.

Senator Elizabeth Warren, in a statement, said, “For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” Warren said. “It’s long past time for the SEC and other financial regulators to wake up and do their jobs — and with a new administration and Democrats running Congress, I intend to make sure they do.”

Sen. Ted Cruz showed his support to Rep. Alexandria Ocasio-Cortez for her tweet:

“This is unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.As a member of the Financial Services Cmte, I’d support a hearing if necessary.

Rep. Ocasio-Cortez hosted a Twitch stream to discuss the issue.

Bloomberg news reported, “Two leading House and Senate committees pledged to hold hearings on the recent gyrations in the stock market as lawmakers voiced bipartisan outrage at platforms that curbed trades in companies like GameStop Corp. that were fueled by the social media site Reddit.”