For the Average Joe who was confused regarding headlines about GameStop and Wall Street and Reddit and short selling last week, we’re going to break it down for you as best we can. Disclaimer: We are not economists or market experts.
For background, GameStop is a brick-and-mortar store that sells, buys and trades videogames and gaming consoles. GameStop also has an online presence — like most retailers — but with the videogame world increasingly using internet downloads and streaming, there’s a decreasing market for physical games. In real world terms, think of GameStop as the gaming version of Blockbuster — and we know what happened to Blockbuster once Netflix streaming took off.
Then there’s Reddit. Reddit is an online forum with thousands of conversations on hundreds of topics. Users can share news or content as well as comment on other users’ posts. Subreddits are areas with Reddit dedicated to specific topics and all the related content. The GameStop stock drama originated on a subreddit called WallStreetBets, where individual investors encouraged — and continue to encourage — each other to buy GameStop stocks.
So what happened exactly? Well, word spread on WallStreetBets that large brokers and other Wall Street powerhouses were betting that GameStop stock would fall dramatically in value and decided to short sell the stock (more on this in a minute), which is to essentially bet against a business. That’s when the people of Reddit said “Not today, Wall Street,” and bought up the stock, sending prices skyrocketing.
Here’s how short selling works, using baseball cards as an example. You borrow a collection of not particularly valuable or rare baseball cards from someone with a bunch — in terms of stocks, usually a brokerage, but we’ll say your super-collector friend for our purpose — with the promise of returning an identical collection of cards by a set deadline — say, the end of the month. You then sell all those baseball cards, betting that the price for the cards will drop once you’ve sold them. Ideally, you’d buy them back cheaper. You return the cards you borrowed, but you get to keep the difference between the selling and buying price. If you sold 100 baseball cards for $1 each, you made $100. Then, you buy 100 cards later for 50 cents each, ultimately paying $50. You’d make $50 in profit (100 – 50 = 50).
But imagine that, instead, a group of baseball card collectors finds out you’re trying to make money buying and selling low-value cards and they don’t like it. So a bunch of collectors buy up those low-value cards. Each person can only afford to buy a few cards, but there are dozens of people doing this. The demand for the cards is now much higher than the supply, which drives up the cost of each card. But you still have to return 100 cards — identical to the ones you borrowed — to your friend by the end of the month, regardless of the current price. The cards you sold for $1 now cost $1.50 apiece. After buying 100 cards to return to your friend, you’ve lost $50 (100 – 150 = -50).
Now imagine that on a scale of billions of dollars. For the financially savvy and the stock-market fluent, there are far more intricacies, such as exact percentages of stock value rise and fall, and day trading vs. after-hours trading, and the big question of what will happen when GameStop’s artificially inflated stock falls again. But for the rest of us, all you need to know is internet users are trying to troll Wall Street and — for the moment at least — succeeding.
