Causes and fallout of the recent GameStop stock incident
During the last two weeks in January, GameStop’s stock price skyrocketed from $40 to over $300 – a record high for this company. To make matters even more surprising, this spike traces back to average American citizens, not the people on Wall Street. GameStop’s major failures as a business have caused their stock to stay at low prices. As a result, several hedge funds (pooled investment funds) have been taking advantage of GameStop’s failures by betting against them while option trading. Option trading is, in essence, betting that
a company’s stock price will or will not reach a certain amount before a predetermined date in exchange for initial payment. If whoever’s betting guesses correctly, they have the option to purchase the pertaining
company’s stock. If they guess incorrectly, they have a legal obligation to buy said stock in quantities of 100.
For example, if someonewere to do this with Apple, they might bet that Apple’s stock price won’t go over $150 in one month for payment. If correct, they don’t have to buy anything. If wrong, they must buy Apple stock. Making this bet against GameStop seemed quite safe, given the corporation’s loss of popularity over the years as digital game purchases became the norm for people. However, this “safe betting” displeased a
group of Reddit users around the week of Jan. They felt it wasn’t fair that these hedge funds had been making sure-fire money off a system that should be a gamble for most average citizens. Consequently, they created an internet campaign to persuade a large number of people into purchasing GameStop
stock to drive the price up and disrupt the hedge funds. And it worked. In a matter of sheer days, the GameStop stock price rose hundreds of dollars, devastating a multitude of hedge funds before
dropping only around a week later. They were then forced to purchase the hundreds
of GameStop stocks they bet against, losing collectively over $5 billion.
. “If I were working at a hedge fund, I would probably feel sympathetic to the Redditors and understand where they’re coming from,” personal finance and business education teacher Narciss Greene said. “But
at the same time, I’d say ‘this is insane; this shouldn’t have happened.’” Much controversy has swirled over
whether the social media group was in the right or wrong. On one hand, they severely hurt several hedge funds, but on the other hand, they seemed to have done something about this easy way to make money. And
although this sort of “sticking it to the man” has happened in the past, the fact that average people caused the spike also caused
the dismay felt by the general public. All in
all, this series of events certainly raises some
valid questions regarding the functionality of
the stock market.