What is happening with GameStop (for non-financial people)
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I work at a financial media company… but as a web designer. So, I am no more qualified to talk about financial news than this person.
So if you want an in-depth nuanced explanation of what happend with a lot of intimidating financial jargon, I strongly encourage you to read something written by someone more qualified.
But since friends of mine keep asking me about GameStop, and I had been avidly following the story, I wrote up some thoughts and was told they were understandable, so I figured that might be helpful for others, and I am sharing here as well.
A sample of an email to me:
Greg, what’s the buzz regarding the GameStop stock trading issue?
I don’t fully understand it. It sounds like some hedge funds that spent a boatload of money betting GameStop would go bankrupt. (I think that’s how stock shorting works), and a large group of everyday investors decided to stick it to the hedge fund and caused the price to jump up and screwing over the hedge fund guys. And now Robinhood brokerage service stopped letting people buy or sell GameStop stock for some reason.
Is that correct? What’s the Fool take of that?
My reply:
That’s pretty close to my understanding of shorting, but the company going bankrupt is the ideal case cause you never have to pay them back.
A metaphor for shorting that made sense to me was this: I borrow your ladder and immediately sell it online for $100; then, a bit later, I pick up the same ladder on sale from some big box store for $45. I return a ladder to you and keep the difference ($55). That is sort of how shorting works.
Now, if you moved away somewhere in there, I never needed to buy the new ladder and keep the whole $100; that’s that ideal case if the company goes bankrupt.
So, GameStop was shorted by hedge funds. I think Melvin Capital had it shorted like 140% (and if you figure some shares are unavailable, locked into CEO bonuses and such, it could be…
