Recently, Reddit made national news. A group of Redditors got together and decided they would buy stocks from GameStop, a company that sells things related to video games. The stock prices skyrocketed. The buyers made a lot of money, enough, according to one Redditor, to pay off a majority of his student loans.
The earliest stock market dates back to the 1600s. The Dutch East India Co. was trading commodities throughout the world. The company turned to people who could invest as a way to fund their journeys. By funding the journeys, the people also became partial owners of the company and gained some of the profit made by the company. These investors helped the Dutch East India Co. expand its journeys, which then increased the profits of the company and the investors themselves.
But, the stock market today works in a much more complicated way than it did back then. Imagine that you want to start a new bakery company. You would have to first pitch it to some investors and if they decide that it’s worth their time, they will pitch in some money. This initial investment is called the initial public offering.
Then, after the IPO, other people can decide whether they want to invest in your company. If they think it’ll do well, they will become partial owners. As more people become interested in your company and invest in it, the more your company will grow, and thus, the price of buying stocks from your company will also increase.
But, people can also lose interest in your company. Let’s say people got sick from eating the goods your company was selling. When your investors find out about this, they’ll start selling their stocks and stop being partial owners. As more and more people sell their stocks, the value of the stocks in your company will become lower. But there are many variables that influence how well a company is doing at a given moment.
I am a huge Swiftie, so this next analogy uses Taylor Swift. The CEO of her old label is a guy named Scott who wasn’t letting her own her work, which is why she’s re-recording all of her albums except for “Lover,” “Folklore” and “Evermore” (the last three were made under her new label that actually let’s her own her work).
So lets pretend that Scott bought some CDs from Taylor Swift and sold them at a really high price. He expected that after some time, he could buy back the CDs for a lower price than he sold them. By doing so, he would make a lot more money. But, after some time passed, the people who bought the CDs were selling them at an even higher price than what Scott had sold them. Since Taylor technically owns those CDs, he would have to buy those CDs back and give them to her. In this case, Scott lost money.
Now let’s pretend that Scott was expecting the CDs to do really badly, so he sold the CDs at a high price so that when he bought them back at a lower price, he was making a huge profit. And let’s pretend that when he checked after some time passed, he was right (which would be impossible in the real world) and when he bought them back, he made a lot of money.
In this analogy, Taylor Swift is the GameStop stocks, Scott is what’s called a hedge fund, and the people buying the CDs are the Redditors who were buying the GameStop stocks. The hedge funders were angry because they had been betting on GameStop doing poorly (which had been the trend before). So when the Redditors caused the GameStop stocks to increase, the hedge funders lost a lot of money.
The beautiful thing about the stock market is that ordinary people can invest in it and make a lot of money.
Vaageesha Das is a junior at Morgantown High School.
Today’s information comes from:
Hayes, A. (2020, August 28). A breakdown on how the stock market works. Retrieved February 15, 2021, from https://www.investopedia.com/articles/investing/082614/how-stock-market-works.asp;
Morrow, A. (2021, January 28). Everything you need to know about how a reddit group blew up Gamestop’s stock. Retrieved February 15, 2021, from https://www.cnn.com/2021/01/27/investing/gamestop-reddit-stock/index.html;
TED-Ed. (2019, April 29). How does the stock market work? – Oliver Elfenbaum [Video]. YouTube. https://www.youtube.com/watch?v=p7HKvqRI_Bo