GameStop, Reddit and the Battle of Wall Street
Last week, you may have seen the headlines about something truly whacked out going on in the stock market – about GameStop, this ailing chain of retail stores that sell video games. For no discernible business reason, its stock shot up hundreds of percent in a matter of days.
Correspondent David Pogue explains what happened:
You know the formula for making money on the stock market: Buy low, sell high. But it's also possible to make money when a stock goes down. This is called "shorting" a stock; you are betting that the company's stock will fall. It's a little complicated, but the basics go something like this:
When the stock is high, you borrow shares from your brokerage, and then you sell them.
Now, of course technically you still owe those shares to your brokerage, so you wait for the price of the stock to go down, and then you buy them back for much less money. You return the shares to your brokerage – and you've just made money!
Unless of course the price of the stock went up in the meantime. In that case, you're in trouble.
Wall Street doesn't like GameStop much. After all, who's buying video games in a physical store anymore? So, the hedge funds had shorted GameStop – betting against it.
And last week, they met their match.
At Reddit.com, traders on the WallStreetBets forum were encouraging each other to push shares higher.
Jaime Rogozinski started WallStreetBets in 2012, as a place where amateur investors could talk about quick stock bets. They tend to be snarky, funny, a little reckless.
"People wanna take risks and they wanna make some money," Rogozinski said. "They're not looking at it as, 'I'm gonna lose my money.' They see this as, 'I'm purchasing the possibility of making money with a non-refundable ticket.'"
So last week, a funny thing happened: these amateur investors on WallStreetBets began to buy up GameStop stock, driving its price up, and egging each other on. This stock that cost $6 a share only four months ago hit $469 at one point last week.
"It went bananas," said CBS News business analyst Jill Schlesinger. "More than 130% on a single day. You don't see things like that on Wall Street,"
She's witnessed how the big brokerage houses refer to mom-and-pop, individual investors, also known as retail investors: "Behind closed doors, they'd call the retail investors the dumb money. And they'd call the institutions, the hedge funds, the private equity people, that was the smart money. The interesting part of this story is that the cost of trading is so low, executing a trade is so easy, that you can all of a sudden harness the power of the 'dumb money' to go up against the 'smart money.'"
Now remember: All those big New York hedge funds had to buy GameStop shares from the market in order to return it, and all the buying they did ended up driving the price even higher.
Pretty soon, some of the Reddit investors had made millions on paper-and the hedge funds were in desperate trouble. One of them, Melvin Capital, had to borrow almost $3 billion to cover its GameStop short.
The internet went crazy. The little guy had beaten the fat cats.
Rogozinski said, "There was this sense of, 'Hoo wow, look what we've done. We just knocked over a huge hedge fund. And we're just a bunch of no-nothings, amateurs! Feels good to have one of these guys get knocked out.'"
By the way, it wasn't just GameStop; something similar is going on with other lame-duck companies like the movie chain AMC and Blackberry.
The SEC is investigating, and the story is still unraveling.
But some aspects of this tale, Schlesinger said, won't change a bit: "For as long as I've been in this business, there are two dominant forces: There is fear, and there is greed. And there is nothing that will legislate that or regulate that away."
See also:
- Corporate executives reap millions from Reddit stock frenzy
- Congress plans hearings after GameStop stock frenzy and Robinhood trading freeze
Story produced by Alan Golds. Editor: Ed Givnish.