GameStop stocks have sored after thousands of investors have bought in after a hedge fund tried to short the company. New York Times. The effort, organized on Reddit and 4chan has made thousands of dollars for individual investors at the expense of the Melvin Capital hedge fund. Melvin Capital was shorting GameStop due to the damage the pandemic has done to the company and the shift away from physical media and towards digital downloads. Despite efforts to control the investors, people are still buying stock in GameStop and are also buying stocks on other troubled businesses, like AMC and Blackberry.
My Comment:
Fairly surprised to see a neutral article on this from the New York Times. I had figured they would have been all in on the hedge funds as many of the outlets that are have already branded the Redditors and Channers as "white supremist" for simply doing to the hedge funds what they have done to everyone else.
As for what is happening, I am no expert on stocks and economics, otherwise I would have made some money off of this. But from what I understand what Melvin Capital did here was pretty scummy. Shorting a stock is legal but extremely dangerous due to this exact scenario. Basically shorting stocks is a good way to lose money if you fail at it. If I was one of their investors I would be furious with them, though it's not likely that anyone would have predicted this.
So what does it mean to short a stock? If you expect a stock to lose value you can then borrow stock from people and sell it at a high price. When the stock collapses you buy it back and pocket the difference. If, for example, you borrowed the stock at $100 a share and then it lowered to $50 when it came due, you would pocket $50.
The problem is that if you are wrong on your bet you can lose massive amounts of money. What r/wallstreetbets and /biz/ have done here is inflate the value of GameStop stock to the point where they are making thousands of dollars. Melvin Capital is REQUIRED to buy back this stock so they have to pay whatever price the stock is worth when it comes due, which happens this Friday.
Even worse is that Melvin Capital borrowed more stocks than actually exists. That means if they somehow buys every single stock they are screwed. How this is legal is beyond me and for all I know it is not but it made a bad situation for them a lot worse.
Is this money a sure thing for the investors? Absolutely not. Right now it's a giant prisoners dilemma. If everyone holds onto the stock they are going to get a huge payday. But if they do not than the first people who sell the stock will make out well while everyone else loses money. Of course, unlike Melvin Capital, the losses they will incur will only be what they initially invested, so unless they invested their life savings they should be fine. And even if they price of the stock collapses they will probably still have more money then what they started with. It's a very high risk high reward situation to be sure.
As for GameStop itself, I have mixed feelings. They always had a terrible business model that was mostly focused on screwing over people who sold them used games for pennies on the dollar. They were never a good company and they drove a lot of better companies out of business.
Though they may have deserved to go out of business they probably didn't deserve to be murdered by Melvin Capital. The company has thousands of employees and killing them would mean that they would be out of work. Plus they might be able to use all this new money to actually improve their business. I don't think they will but at least they will have a chance now in a shaky economy.
I have almost no sympathy for Melvin Capital. Though they are losing billions of dollars, hedge funds are a joke. They don't let just anyone in and you pretty much have to have 8 figures in wealth to even be considered to invest with them. They have always had an advantage over the little guy and have screwed over everyone else so many times that it's more than a little satisfying to seem them get screwed over for once.
I think the biggest problem today in America is that the elite have almost zero consequences for their actions. They are hoarding wealth while everyone else suffers. President Trump tried to fix that (with some success) and the elite did everything in their power to destroy him. Taking down one of the biggest hedge funds and embarrassing the hell out of them is a major accomplishment and something I hope we see more of. The people on Reddit and 4chan deserve a lot of credit for this.
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