Hedge funds?

[Thebestoftherest]

I been hearing a lot about hedge funds lately and don't know what they are. Will this mean Gamestop be going under, does that mean I can't get my preorder ready?

[Fuzzy Necromancer]

Here's a summary of the events in layman's terms:

A share in gamestop is just a piece of paper that says “I am owed 1/100,000th of the profit Gamestop made this quarter.“

Lets say they cost 1$ each, so you buy a share.

If gamestop makes 200,000$ in profit that quarter, you get 2$ of it. Nice! You’ve doubled your money!

If gamestop makes 50,000$ in profit that quarter, you only get 50c. Lame. You’ve lost half your money.

If you buy enough shares, companies usually give you a spot on their coveted Board of Investors, so you get a say in how the company spends your money.

Thats how shares work.

Lets say you’re an investment firm, and you own 100 shares in gamestop. You see that Gamestop hasnt been doing well recently. You’ve got a brilliant plan.

You’re going to to sell all 100 of your stocks, wait for the price to go down, and then buy them all back on the cheap.

If all goes well, you’ll sell 100 stocks for 1$ each, netting you a cool 100$. Then in a few months after the price goes down, you'll buy back those same 100 stocks for 75c each. You’ll have the same stocks, but be 25$ richer. This is called shorting. Firms do it all the time.

Except, hold on, a bunch of redditors noticed you doing this. They bought all your stocks, but when you wanted to come buy them back cheap, they’d cranked up the price tenfold! Now you’re just 100$ in the hole, and you need to get those stocks back or you lose that seat on the gamestop board of investors, so you’re forced to buy from the redditors at whatever price they’re asking!

So you cave, you keep your board position and spend 1000$ on a 100$ box of stocks, and now you’re hella in debt.

You are very mad about this, even though this process is how you make a lot of your money. You go to the federal government crying for a bailout. You beg for some new FTC regulations to ensure these filthy poors can never do this to you again. You are probably going to get both.

[TGLS]

Here's a summary of the events in layman's terms:

A share in gamestop is just a piece of paper that says “I am owed 1/100,000th of the profit Gamestop made this quarter.“

Lets say they cost 1$ each, so you buy a share.

If gamestop makes 200,000$ in profit that quarter, you get 2$ of it. Nice! You’ve doubled your money!

If gamestop makes 50,000$ in profit that quarter, you only get 50c. Lame. You’ve lost half your money.

If you buy enough shares, companies usually give you a spot on their coveted Board of Investors, so you get a say in how the company spends your money.

Thats how shares work.

Lets say you’re an investment firm, and you own 100 shares in gamestop. You see that Gamestop hasnt been doing well recently. You’ve got a brilliant plan.

You’re going to to sell all 100 of your stocks, wait for the price to go down, and then buy them all back on the cheap.

If all goes well, you’ll sell 100 stocks for 1$ each, netting you a cool 100$. Then in a few months after the price goes down, you'll buy back those same 100 stocks for 75c each. You’ll have the same stocks, but be 25$ richer. This is called shorting. Firms do it all the time.

Except, hold on, a bunch of redditors noticed you doing this. They bought all your stocks, but when you wanted to come buy them back cheap, they’d cranked up the price tenfold! Now you’re just 100$ in the hole, and you need to get those stocks back or you lose that seat on the gamestop board of investors, so you’re forced to buy from the redditors at whatever price they’re asking!

So you cave, you keep your board position and spend 1000$ on a 100$ box of stocks, and now you’re hella in debt.

You are very mad about this, even though this process is how you make a lot of your money. You go to the federal government crying for a bailout. You beg for some new FTC regulations to ensure these filthy poors can never do this to you again. You are probably going to get both.

It's more complicated than that. Shares aren't obligated to payout. Shares don't expire either, so paying 50 cents on a dollar share would be a good deal. Short selling doesn't involve selling your own shares and buying them back later to maintain control, it involves borrowing shares from other people (for a price), selling them, and buying them back within a certain period of time (hopefully at a lower price to turn a profit).

GameStop hasn't been making money for a long time now. This is why many hedge funds and investors felt that short selling the company's shares would be a good move. Then a bunch of chucklefucks and finance guys got together and noticed that they could buy shares and hold them, increasing the price of the shares (which obeys supply and demand) and making a profit as the contracts with the hedge funds expired (which drove up demand for the stock even more).

[Beelzquill]

And now I believe some of the internet trading companies like Ameritrade and Robinhood (I think) are preventing people from buying Gamestop stock. Seems like a "rules for me(hedge fund guys) and rules for thee(normal redditors)". Either way this is funny to me.

[Rocketboy1313]

Here is a video that attempts to explain the mechanics of what is going on.
https://youtu.be/sH_F7mQIM0M

[Fuzzy Necromancer]

GameStop hasn't been making money for a long time now. This is why many hedge funds and investors felt that short selling the company's shares would be a good move. Then a bunch of chucklefucks and finance guys got together and noticed that they could buy shares and hold them, increasing the price of the shares (which obeys supply and demand) and making a profit as the contracts with the hedge funds expired (which drove up demand for the stock even more).

Sounds like the "chucklefucks" made a smart financial decision and now people who supposedly make smart financial decisions for a living are crying foul because they were outsmarted.

[TGLS]

GameStop hasn't been making money for a long time now. This is why many hedge funds and investors felt that short selling the company's shares would be a good move. Then a bunch of chucklefucks and finance guys got together and noticed that they could buy shares and hold them, increasing the price of the shares (which obeys supply and demand) and making a profit as the contracts with the hedge funds expired (which drove up demand for the stock even more).

Sounds like the "chucklefucks" made a smart financial decision and now people who supposedly make smart financial decisions for a living are crying foul because they were outsmarted.

Sure they did. But my understanding is a non-insignificant number of retail investors were in it mostly because they like GameStop.

[J!!]

Somebody likes GameStop?

[TGLS]

Somebody likes GameStop?

From the Vox article I read the other day:

The GameStop episode is a mix of factors serious and silly — part retail traders demonstrating some actual power in the market, part accepting that some of this just makes no sense. Whether GameStop took off because it’s a meme stock — a stock in which interest is as much cultural or social as it is financial — or because there is something to the business case is unclear. There is a business case, there is a cultural interest; the balance between the two in driving the price is indeterminate. Part of it might basically be a joke.

[Fuzzy Necromancer]

Pharmaceutical Giant: “This medicine costs $3 to make, but I’m selling it to sick people for $300 because I know that they can’t just refuse to buy it.”

Rich People: “That’s a smart business strategy.”

Reddit User: “These GameStop shares cost me $3 each, but I’m selling them to short investors for $300 each because I know that they can’t just refuse to buy it.”

Rich People: “THE HORROR!!! GOVERNMENT, PUT A STOP TO THIS!!!”