The biggest piece of news yesterday was the fact that both Gamestop and AMC stock exploded last night as the result of a subreddit called r/wallstreetbets. How and why this happened is convoluted to a lot of people, so let's break down what exactly happened yesterday.
The GameStop effect is extending to AMC. The theater chain soared 300% at the open to the highest since 2018… https://t.co/c2Dkb719fE— Bloomberg Markets (@Bloomberg Markets)1611758556.0
So, crucial to understanding what happened is knowing what means to short a stock. Essentially, it's a practice done in private by hedge funds, making a sort of bet that a stock won't go up in price. Hedge funds go to a stock collective, like the Nasdaq or S&P 500, and the hedge fund says they believe certain stocks are going to tank, and won't go up again. So, they buy a large amount of this stock, predict a fail date for that company, and if they're correct, they make massive amounts of money off that bet.
What the Subreddit Did
GameStop, BlockBuster, Bed Bath & Beyond, AMC… it’s like some kids remembered their favorite places in the mall 20… https://t.co/HiSTvHvaai— Mike Murphy (@Mike Murphy)1611760468.0
r/wallstreetbets is a subreddit that, through trial and error, attempts to locate the stocks that hedge funds have placed short stock bets on, and then buy that stock en masse. By buying up shares of companies predicted to be shorted, they're driving up the price of that stock at a time when failure was not only predicted, but betted on. By driving up the price in a coordinated manner such as this, Gamestop surged 700 percent and AMC 200 percent.
By making these bets fail, of course, hedge funds and Wall Street in general lose millions, while stockholders of these companies make a large multiple on their investment.
Why Does this Work?
This works in a practice in stocks known as pump and dump. Basically, you can create growth not through the increased profits or performance of a company, but by simply buying massive amounts of their stock. This drives up the price, because the market is tricked into believing the company is performing well, due to all the new investors. After the stock is driven up to an appropriately high level, the investors then sell, making a quick profit off these companies.
The GameStop saga will be counted as one of the most epic short squeezes ever! The latest: * Stock up another 80%… https://t.co/iXbl8yGsdr— CNBC-TV18 (@CNBC-TV18)1611750443.0
So, in the simplest possible terms: these subreddits manipulated the market by buying a lot of stock in companies that had been predicted to fail, driving up the price an insane amount, making hedge funds lose millions while they made millions themselves. NBC's Prashant Nair also does a fantastic job of summarizing the events in the tweet above.
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