Why was the stock market roaring in the early 2021? How did the American video game retailer company’s shares whipsaw from $17.5 USD to $347.51 USD in a matter of weeks. How did a bunch of investors pack in loads of cash while one prominent hedge fund got a loss of more than a 100 Billion USD? How did ‘Big Short’ investor Michael Burry make a 1,500% gain on GameStop during its Reddit-fueled rally.
Find out the answer in this article. Let’s understand a few terms before we get down and dirty!
A hedge fund is an alternative investment that is designed to protect investment portfolios from market uncertainty, while generating positive returns in both up and down markets
Short-selling: The reverse of the generic buy low, sell high – sell high, buy low. For example, if the gold price for the day is Rs.50000 per 10 gm and you believe the price is going to drop in a couple of months. You borrow the stocks, sell it and buy it back later when it is Rs.45000/ 10 gm, thereby making a profit of Rs.5000.
Negative float position- in simple terms, negative float implies that withdrawals are exceeding deposits in an account. Short sellers borrow more stocks than there were shares available to trade in the market.
GameStop, an American video game and gaming merchandise retailer announced the closure of many stores and shares that could be bought for as low as $3.25 USD on Jan 12, 2021. Opportunistic hedge funds thus began short-selling GameStop. The good people of r/WallStreetBets—an irreverent subreddit for stock market noticed that the Melvin hedge fund and other firms had taken so many short positions that there was a negative float position created. Invigorated, a huge number of them plotted to buy the stocks, but not sell them so that the hedge funds don’t get to buy them and return the shares, thereby incurring losses. This was a massive supply-demand gap case. This made the share prices skyrocket from $17.5 USD to $34.7 USD to $50 USD to $150.3 USD to $347.51 USD. Melvin’s has closed its position now but at a huge loss.
Michael Burry, the founder of the hedge fund Scion Capital, which closed in 2008, invested 16.46 Million USD on GameStop, earning back 260.6 Million USD, giving him a margin of 1500% profit.
Hedge funds short-sell shares and create a pressure on it so that its price keeps falling down for their own profit which drives losses for many retail investors. Melvin’s hedge fund had also short sold Tesla’s shares a long time ago which made the prices fall for a bit. Tweets from Elon Musk and Venture Capitalist Chamath Palihapitiya (Former senior executive at FB, CEO of Social Capital) encouraged the crowd furthermore to take manipulation of the stock market out of the hands of hedge funds and into the hands of “the people.”
That’s how the power finally went from the rich to the common!
Eduindex News 