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(CNN Business) – There was a lot to break up in this week’s flood of news about GameStop, the stock market, Reddit groups, trading apps and hedge funds. If it all sounds like a lot, we can’t blame you for understanding what’s going on.
Although we don’t know how the so-called Reddit Rebellion will change the future of investing, it is safe to say that Wall Street will never be the same.
Here are five main things you need to know about a wild week on Wall Street:
1. It 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 versus a group of Wall Street professionals known as short sellers.
In this case, David is the little merchants who congregate on the Reddit page, aka the Reddit Army, or the Reddit Community, depending on your point of view.
“They have seen the rich get very rich by taking advantage of cheap money, and they want their share as well,” said Richard Fisher, the former chairman of the Federal Reserve in Dallas.
Their mission has two primary goals: to raise stock prices to make profits for themselves, and at the same time, to force institutional investors to drop bearish bets against troubled companies, such as GameStop, AMC, Macy’s and many others.
Goliath here, they are mostly hedge funds that short these stocks – in other words, the big investors are betting that those stocks will collapse. They are also the elite of Wall Street that millions of investors rely on to make smart decisions to boost their portfolios. But working in an industry associated with the House of Cards system that led to the 2008 financial crisis makes these giants not quite likable. Posts on the Wall Street Betting subsidiary site are enjoying watching the short sellers lose billions of dollars.
2. How the Games Rally started
The Wall Street betting community, which now has about 5 million followers, has been around since 2012. Describing itself as if “4Chan has found Bloomberg,” the forum’s extraneous nihilism, mysterious language and stinging memes sparked a war on the perceived mainstream.
The group noted that GameStop, the video game retailer, was critically short of hedge funds. (The consensus on Wall Street appears to be that the company will soon go bankrupt.)
Reddit investors took a different view of the short sellers and began to buy shares of the company that they believed were undervalued.
3. Why did the explosion happen?
Although it’s been taking shape a while ago, the rally really took off on Monday, January 11, when GameStop announced that three new directors will join its board of directors, including Chewy co-founder Ryan Cohen. Investors liked that Cohen brought the digital expertise to the table, something GameStop so desperately needs, as video games go digital and malls keep declining.
GameStop’s stock rose just under 13% that day. But this was not an ordinary hike. Two days later it was up 57%, then 27% … and so on. Reddit’s crowd has also led massive leaps in AMC, BlackBerry, Macy’s, and other major selling stocks.
As of Friday, GameStop’s stock is up 1,587% since the start of January.
And one year ago, the cost per share was about $ 4. It’s now about $ 150.
The spike ultimately had little or nothing to do with GameStop’s power as a business. Since investors who follow Reddit bought a lot of GameStop shares, short-term sellers have had to buy shares to cover their losing bids – thus boosting the share price even further. This is known as the short buy.
Millions of people participated, including Elon Musk.
It quickly became a “populist uprising armed with brokerage accounts and no fees,” said Kristen Romans of CNN. The only “seasoned” players are Wall Street.
4. Robinhoud’s reverse attack
On Tuesday, GameStop stocks were the most traded, and then Robinhood’s app smashed the party.
Thursday morning, due to extreme volatility, the free trading app favored by millions of amateur investors suspended trading. That left the Wall Street betting crowd with only two options: keep 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 surging nearly 40% earlier in the day.
The reaction was swift. Those who were withdrawing money on GameStop were, to put it mildly, angry.
A consensus emerged on social media that Robinhood, who had built his brand on “democratizing” investment, appeared to be succumbing to the pressure of powerful institutions on Wall Street.
Representative in Congress, Alexandria Ocasio-Cortez, described the decision as “unacceptable.” A Reddit user quickly filed a class action lawsuit, claiming that Robinhud had rigged the market against his customers.
Robinhoud gave in on Thursday night, saying he would resume the “limited” buying of shares the next day. It also received $ 1 billion in cash from its private investors, indicating a lack of liquidity.
5. The bubbles will burst … eventually
There’s a perception that GameStop was undervalued, but hardly anyone thinks that it, BlackBerry, Macy’s, AMC, or any of the other companies that the Reddit audience promotes have the basics 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 opportunity 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 having people come in at the end at a very high price and get burns,” said Richard Fisher, former chairman of the Federal Reserve in Dallas.
The Securities and Exchange Commission, the agency that regulates Wall Street, said it will closely review measures taken by trading platforms to restrict transactions.
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