America and Wednesday’s in 2021 have started to form an unusual pairing, with a historic event occurring on each Wednesday of this new year.
First, there were the Capitol Riots on January 6th, sending shockwaves across the world.
The following Wednesday, January 13th, saw a historic 2nd impeachment of President Donald Trump, with the inauguration of his successor coming a week later; Wednesday, January 20th.
Now this last Wednesday, January 27th, Reddit users sent Wall Street into chaos, allowing stock prices to soar in “underperforming” businesses.
What’s happening with GameStop?
At the beginning of last week, the price of a single share in the video game company, GameStop, would cost a casual, ordinary investor $20 to purchase.
At the end of this week, a single share now costs over $300, but how did this happen? All of this chaos has been caused by a Reddit group that contains over 2 million members, labeled r/WallStreetBets.
Day traders; who would just be your casual, normal people getting into the stock market, noticed that the Wall Street big boys; the Hedge funds, had started to bet against GameStop using a trading technique known as short selling.
Short selling is basically when these big, Wall Street Hedge funds will “loan” shares in a small company like GameStop from casual investors, but instead of keeping these shares, they will sell them on immediately, believing that the price of these shares will then go down so they can purchase them back for less than they paid for before returning them to the casual investors.
One group of investors in the r/WallStreetBets noticed this technique being utilized with GameStop and decided to take advantage, noticing that GameStop was in what is known as a “negative float”, which is when the number of shares that have been loaned to investors, that will eventually need to be returned, is greater than the number of shares available to trade.
Redditors who owned these shortened shares decided to keep hold of them, sending Wall Street into a frenzy, as the only way to now repurchase these shares is to buy them way over 100% of their original value, which they won’t do, resulting in Hedge funds such as Citadel losing billions of dollars.
The longer the Redditors hold onto their shares in GameStop, the higher the price will rise!
Wait…so now the US government is involved?
As their way of sticking to “the man”, Redditors who hold GameStop have sent Wall Street into meltdown, causing the United States government to monitor the situation.
Press Secretary Jen Psaki was bombarded with questions about the situation at her briefing yesterday, yet refused to provide clarity on President Biden’s position.
Due to the volatility of the situation, trading sites such as Robinhood have restricted their markets, causing mass controversy.
When questioned, Jen Psaki cited that the President has been briefed multiple times by his economics team, who are keeping a “close eye on the situation”.
However, Psaki failed to say whether or not Biden has a plan for this situation, especially how he plans to protect regular investors if there is a market correction, who face the prospect of terrible losses.