By Giancarlo Valle
In the past year, millions of people were stuck in their homes, and many found the stock market as a new source of entertainment. However, the vocabulary around Wall Street can seem complex:
Stock Market Terms for Dummies
Brokerage: A brokerage is a company that connects buyers and sellers.
Shorting: Shorting is when an investor sells a share of a stock that he/she does not own in return that in the near future they can buy it for cheaper and profit the difference. Ex: I sell 100 shares of Company A at $5 each, I just collected $500. When Company A hits $1, I rebuy the 100 shares for $100 and I profit the difference of $400. If Company A goes up to $10, the short seller would be forced to buy the shares for $10. This would lose the short seller $500.
Float: A float is the total amount of shares sold to the public.
Hedge funds: Hedge funds are institutions that actively trade and manage billions of dollars of customer money.
Subprime mortgages: Subprime mortgages are mortgages that lack the structure of modern mortgages due to the reliance on high-interest rates and fees regulated by banks. These mortgages did not cover homeowners from a market crash.
Insider trading: Insider trading is a felony in which an individual has inside knowledge of a company and acts on it. For example, I am the CEO of company A, I know tomorrow we are merging with Apple, in preparation I buy $1 million worth of shares, and tomorrow, the stock price skyrockets. I can profit off this because I had information others didn’t.
Over 10 million new accounts were created by young investors looking to make money during the pandemic. Many of these people flocked to apps such as Robinhood, a brokerage made to target the less experienced.
2020 became one of the most prolific years for the stock market following the crash of almost 60% in February due to coronavirus fears. With the help of the Federal Reserve and stimulus checks, the United States was on track to the fastest recovery of any economy in the nation's history. By July, stocks hit an all-time high, quickly recovering from March lows amid COVID-19 fears.
“The current status of the market is unlike any other years. Buying volume is at an all-time high with the influx of many new investors causing prices to drive up as seen in the month of January. Education and the spread of helpful ideas are easily accessible to many users through social media platforms. People will soon find out how powerful this tool is to building wealth when taking proper risk management and diversifying investments,” said senior Thomas Stec.
While this was happening, new and eager investors formed a community called WallStreetBets on the popular discussion thread app, Reddit. WallStreetBets is a platform where young investors thrive; most of the technical analysis in this subreddit is toward high risk, high reward “you only live once” plays. On top of all the money that was being made by investors in this community, there was a growing sentiment of hate towards Wall Street and in early 2021 this feeling took over the internet.
Reproduced with permission from Wikimedia Commons
Prices for shares of GameStop and AMC skyrocketed toward the end of January since many investors on the subreddit r/WallStreetBets saw this as a potentially profitable endeavor.
Following 2007 and 2008, America realized that the market crashed due to banks selling subprime mortgages with high-interest rates to risky individuals, looking to make a profit from these people. Additionally, many large firms on Wall Street were proven to be the reason why the market crashed, and investors such as Bernie Madoff were exposed for fraud and insider trading.
In this year alone, hate towards Wall Street has greatly increased. The American public was infuriated when hedge funds were bailed out using taxpayer money, money that could have been used to provide for the suffering American public. These newer investors remembered that as kids, they may have had to move, or they went through their parents’ divorces that year, or their parents simply could not put food on their table. This hatred towards the elites of America fueled an army of young investors to strike back.
“On top of all the money that was being made by investors in this community, there was a growing sentiment of hate towards Wall Street and in early 2021, and this feeling took over the internet...”
From December to January, the Reddit community of WallStreetBets, along with other groups, found that hedge funds such as Melvin Capital had extreme short positions on GameStop. The total shares shorted was calculated to be 122% of the total float. The total shares shorted, which means that out of the total amount of shares sold to the public, 122% of those shares were sold short. This immense number was nothing anyone had ever seen before because hedge funds do not typically short more than the total stock available.
The amateur investors saw this as the perfect opportunity to get revenge on hedge funds. In order for hedge funds to lose money, those on the internet teamed up and started buying GameStop shares to drive up the price and cause shorts to lose money. From early fall to the end of January, GameStop shares rose from $4 to a high of $490 each.
“I think the current state of the United States stock market is a look into the future of trading stocks. We saw Reddit users from r/wallstreetbets control a ton of the market for the sole people of taking down hedge fund managers. If this Reddit blog has the power to make hedge funds lose billions of dollars, there is nothing the trading community will not be able to accomplish together. Of course, this was pure market manipulation, but the big guys have been doing it the entire time; the small guys decided to have their fun,” said senior Joseph Leonard.
This cost hedge funds billions of dollars and many went bankrupt. In order to protect themselves from the losses, hedge funds pressured brokerage firms to not allow buyers to buy stocks such as GameStop. Brokerages such as Robinhood received backlash due to their restriction of buying stocks. This was once a platform for the retail trader, but now many have seen this as a betrayal. Once hedge funds started losing money, Robinhood pulled the plug and GameStop shares fell 30% that day. This was due to a lack of volume since no one could buy the stock. As a result, the app received a large amount of backlash from politicians such as Congresswoman Alexandria Ocasio-Cortez and Senator Ted Cruz.
Ultimately, at the end of the frenzy, hedge funds reported a $30 billion loss, and multiple class-action lawsuits have started to appear against them for their restriction of trading. To many, this was seen as market manipulation. If courts prove that Robinhood restricted trading to protect hedge funds, the company could be charged with a felony, and co-founder Vlad Tenev could go to jail.