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Award-winning movie the Wolf of Wall street hit cinemas in 2013 and consequently exposed the warped and often hedonistic world of big hedge funds and investment banks. Whilst many eye-watering scenes did much to shock viewers into disbelief, the principal takeaway is that there should be no doubts. For the average joe, a lifestyle like the aforementioned may seem unattainable, but for the rich, it is a reality. In a nutshell, this is the very sentiment that has caused much debate around the battle of Wall Street against amateur investors, and this past week has been an exploration into why Capitalism helps the rich stay rich and how it inevitably ensues in blatant hypocrisy when it no longer works in their favour.
The Ins And Outs Of GameStop vs WallStreet
Many hedge funds such as Melvin Capital (worth 13 billion dollars) had predicted that GameStop’s shares would plummet. This is due to a series of factors, perhaps most pressingly owing to the pandemic. Due to government restrictions alongside the ever-growing position of technology in our society, it is no secret that many brick and mortar shops are struggling to make ends meet. GameStop is no exception, predominantly known for selling videogames, the company has been met with a great deal of competition to date with e-commerce giants such as Amazon providing the same service, it is easy to understand why such predictions were made. This is perhaps what best explains their underwhelming value of $253 million at the start of 2020, a far cry from today’s claims hitting a huge $23 billion. Thus, to understand how the value increased at such a meteoric rate, we must first address the enigma of short selling.
Short Selling
The most traditional method of making ‘capital gain’ or a profit on the stock market is to buy stocks at the lowest price possible, then go on to sell them at a higher price. Higher price minus lower price = profit. Conversely, lesser-known to those not involved in trading is short selling. This essentially is the exact opposite. Whilst this may sound counterintuitive, it is just as viable as the first method mentioned, simply meaning that brokers can technically make twice as much profit as they profit off both the gains and losses of companies. When an investor goes short, they borrow stock from a lender and then sell it as quickly as possible, assuming that the same stock will soon decline in price. Given the right circumstances, they buy it back at the lower price, therefore, still making a profit before reimbursing the stock to the lender.
How Amateur Investors Saw An Opportunity To Exploit Wall Street Short Sellers
Whilst Wall Street’s predictions saw companies such as GameStop moving only towards decline; many amateur investors disagreed. Their reasons might have stemmed from sentimental value, to preserve stores that fuelled the best memories of their childhood. They, indeed, may have also had other intentions, of marking their stance against dated ideals placed upon them by older generations. However, reasons aside, the fact remains that a group of amateur investors banded together and played Wall Street at their own game.
In a post that went viral, people from all over the world came together to drive GameStop’s stock price up by 700 per cent. In doing so, those major hedge funds were forced to cover their losses, putting them at a financial disadvantage. Following this, in a contradictory move, Robinhood, a trading app marketed upon its ability to make trading more accessible disallowed users from buying any further GameStop stock. Not only did its stock consequently fall by 55 per cent, but this has been yet another display of market manipulation; proving that those completely disillusioned by money and power will show no mercy, albeit at the cost of the lives of ordinary people.
Reactions
Class action lawsuits are being filed against Robinhood. The planned hearing regarding the state of the current stock market by the incoming chair of the Senate Banking Committee. The hearing will be involving big names, such as the S.E.C (Securities and Exchange Commission) calling upon them to seriously reconsider how the economy is structured and how to make it more equal.
“People on Wall Street only care about the rules when they’re the ones getting hurt. American workers have known for years the Wall Street system is broken — they’ve been paying the price,” – Senate Sherrod Brown of Ohio. Silver prices have also hit an all-time high, with amateur investors following the GameStop trend. Although GameStop was a unique scenario due to its acute undervaluation, people are following suit to continue the fight against short-sellers on Wall Street manipulating the market. Although this is just speculation, for now, injustices have been recognised and people are united in the notion that they will not be tolerated.
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