If you were one of the lucky few who bought into GameStop a couple of months ago, then congratulations on your new fortune! For the rest of us who still don’t quite understand what happened, here is a breakdown on the Stock war between Hedge funds and Reddit in the GameStop short squeeze.
Hedge funds are firms that solely focus on investing other people’s money. They play the stock market to further their portfolio and make a profit. In order to make the most profit hedge fund managers participate in an act known as shorting.
Shorting occurs when investors sell stock that they own and buy it back at a lower price therefore doubling their share. It would be like if you gave your best friend two cookies to hold on to. These are your cookies, but your friend wants some too. So they give their cookies to their mom in exchange for four cookies. Then they eat two and when you get back you get your cookies and both parties are happy.
This occurred within the stock market but instead of cookies it was GameStop stock. However, hedge fund managers were not secret about their practices and soon people on Reddit heard of this and began to buy GameStop stock.
This meant that the hedge fund managers could not buy back the stock they had sold because the price far exceeded what they sold it for, and as such they cannot give the stock (cookies) back to the owner of the fund.
This resulted in over billions of dollars in losses for these hedge funds. Those people on Reddit did something revolutionary. They used teamwork and collaboration to highlight an inherent flaw in our economic system. By shedding light on the situation, they have helped lay the groundwork for potential legislation that can stop shorting altogether.
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