**Disclaimer: In making this article, I intended it to be informative regarding what had happened with Gamestop in late January 2021. In doing so I went over the stock market briefly for readers to understand what the stock market is, how it works and outlined some of the risks that come with investing. No one apart of Wolf Prints will be held accountable for any losses that may come as a result of being “inspired to start investing”.
Having said that, enjoy reading the article!
What is a stock and how does the stock market work? What are the risks in the stock market?
The stock market is where a person can invest in a company and in doing so get shares for a portion of the profits made by the company. Many people have invested enough into the stock market to the point of making a living off the profits made through their investments. One of the most successful people to profit from the stock market is Warren E. Buffett, at the time of writing this he is 90 years old and worth just over 95 billion USD. Though Buffett found the majority of his earnings from buying companies and improving them. Regardless, his stock portfolio is extremely impressive owning billions of dollars worth of company shares. Though this does not happen immediately as it requires lots of patience and knowledge about how to predict if a stock goes up or down; stockbrokers are people who research companies’ stocks, provide advice to make the best decisions, and also buy and sell stocks on behalf of their client. Buffett had first begun investing at the age of 11 and would make his first million at 30, and first billion at 56. Despite how simple it sounds to just wait for profits to just start coming in, there are also huge risks in investing.
To the left is a chart showing Gamestop’s (GME) stock market value throughout 2021; labeled on it are points in which a person would have needed to buy or sell to maximize net profit by short selling. Though it may seem simple looking at it and being able to add labels onto a chart, being able to predict the next change a share’s market value will take means predicting where the green point will go next. Typically what people would use to know when a stock will decrease in value are a variety of different daily moving averages.
For example, say you buy five shares of a company for 20 bucks each, you’ve invested $100 dollars if it goes up and its market value is now 25 dollars. You’ve just kept the $100 dollars and got $25 in return should you sell at this point in time. Should the market value go down to ten dollars you just lost $50 that you had invested.
Now put that into perspective at a bit larger scale it can be more shares purchased or higher-end stocks, you’ll be investing more and can have a bigger net profit or you’ll lose more of what you had invested. Just like the previous example, there’s a stock worth 20 bucks but this time you invest $5000 worth. Meaning you now own 250 shares; let’s say it goes up 5%, it’s now worth $21 dollars by selling it you made $250. If it had instead gone down 5% you would have lost $250 dollars. Now keep in mind that currently in California the minimum wage is $14; which means it would take nearly 18 hours of work to recover from such loss.
Other than the loss of money, a person should consider any mental toll a loss can have. On June 12th of 2020, a 20-year-old young man Alex Kearns had committed suicide as a result of a misunderstanding regarding his Robinhood account. He believed that he had amassed a large amount of debt of over $730,000 USD. As a means to avoid his family from being exposed to carrying his debt, he took his own life. Kearns left a note to turn on his computer in which he left his explanation as to what happened. A small piece of the note he left behind reads “There was no intention to be assigned this much and take this much risk, and I only thought that I was risking the money that I actually owned”. In reality, the negative amount that had appeared in his account was temporarily negative as the trade he had attempted to make was not yet processed.
What had happened with Gamestop?
In late January, Gamestop, a company that was near bankruptcy, began to make headlines though it was for something much more unexpected. The stock market value for GME had a large increase of around 680%. Having shot up through the roof like the Kool-Aid man’s wall-breaking entrance causing a large shake in the stock market, it caught everyone’s attention. This was a result of an orchestrated short squeeze by Reddit users a part of r/wallstreetbets. A short squeeze is a situation in which Wall Street firms have short-sold stock that is on the rise to continue driving the value up and causing hedge funds to empty in the process.
Hedge funds themselves are pooled investment funds, money contributed by investors and run by fund managers. They aim to maximize returns and minimize risk for their investors. The hedge fund that took the big loss with Gamestop was Melvin Capital and investment management company. The company took a 53% loss while the founder Gabriel Plotkin personally ended up taking a loss of $460 million which the company Citadel would then bail out with a $2 billion investment.
Wall Street would then call for legal consequences due to the public banding together in such a matter which will most likely not be happening and in turn is also pretty hypocritical as Wall Street thrives using similar strategies with their clientele. As the short squeeze was reaching a climax, the popular trading company Robinhood restricted the users from trading shares from a few companies including: Gamestop, AMC Entertainment, Blackberry, Express, etc. Robinhood would rapidly begin to face backlash for the actions as this isn’t the first time they’ve caused a stir over user regulation.
Just this past December, Robinhood had paid $65 million in settlement charges to the Securities and Exchange Commission (SEC). This was a result of having customers orders be sent for execution or “payment for order flow”; and led to Robinhood customer prices being inferior to that of other brokers. In the time this had happened back in late 2018 until mid 2019, it caused customers to lose an cumulative estimate of $34.1 million dollars. Though the companies Robinhood restricted are now once again available to be traded they each have their set limitations to regulate it’s trade; Robinhood will still make headlines for the investigation on the restrictions they set and for the lawsuit over Alex Kearns wrongful death.
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