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GameStop's Reddit-Fueled Stock Surge Explained in Simple Terms

How and why did a group of millions band together to take on Wallstreet via Reddit's online forums?

Millennials versus elitist boomers, amateurs versus professionals — however, you want to call it, the group of Redditors that blew up GameStop's share price this week has the internet abuzz.

The struggling bricks-and-mortar U.S. videogame retailers' recent stock price surge goes far beyond videogame sales and has been cast by some — in grandiose fashion — as a paradigm shift.

We've taken a look at the why, how, and when of the situation for those who know little about it or who want to be brought up to date.

What is a 'short'?

The single most important trading term to understand in the whole GameStop stock surge story is "short." A "short" is when a trader borrows stock from a broker and immediately sells it at the current price. 

The short seller bets on the stock price falling so that they can buy the stock back at a lower price and return it to the broker.

The short seller makes a profit out of the difference between the original price at which they sold the stock, and the price at which they bought it back.

For example: if they sold borrowed stock for $20, and bought it back at $15, they make a $5 profit.

Of course, short sellers take the risk that the stock they sell may in fact rise exponentially in price. When that happens, they must buy back the stock at a loss.

What started the GameStop Reddit stock surge?

A few weeks ago, a Redditor on subreddit r/WallStreetBets discovered that a hedgefund had bought a large amount of "short" stocks in GameStop.

The hedgefund was betting on GameStop share prices going down over the coming months and years due to the recent surge in digital purchases and physical game sales going to online retailers such as Amazon.

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The Redditor convinced everyone via a thread on the WallStreetBets subreddit to buy as much GameStop stock as possible to make the stock price rise — in the past week, GameStop stock rose more than 300 percent.

Reddit-coordinated 'short squeeze'

The rise in GameStop stock prices made the hedgefund lose billions on its short position as it had to buy back the sky-high shares it owed. When it closed its short position and bought back the stock at these elevated prices, GameStop's share prices soared even further.

The hedgefund's losses surpassed $13.1 billion — more than the hedgefund itself was worth. It has now declared bankruptcy. 

What the WallStreetBets group did — essentially price the hedgefund out of its own short position and into bankruptcy — is called a "short squeeze."

Why did they do it?

Even a cursory glance at the r/WallStreetBets subreddit shows that the group feels it is riding high on the back of a huge statement made against Wall Street — much of the group's ire is aimed at the role Wall Street played in the financial crash of 2008. 

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What's more, new no-fee apps such as Robinhood have democratized the way armchair investors can use sophisticated trading instruments, such as options. Much of this was previously associated with high-cost analysts at Wall Street.

So one could argue that WallStreetBets did it simply because they could — and they could make a lot of money whilst doing it.

What are people saying?

The world's richest man, Elon Musk — who has had a few run-ins himself with the SEC over stock prices — chipped in with a typically irreverent and short tweet on Jan. 26:

Yesterday, Jan. 27, Musk also wrote, "even Discord has gone corpo..." Musk was referencing the fact that Discord, another chat platform used by WallStreetBets, had banned the group from using its service.

The word "corpo" was a reference to pejorative slang used in the videogame 'Cyberpunk 2077', in which his girlfriend Grimes makes an appearance.

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Tech investor Chamath Palihapitiya told CNBC that, "instead of having 'idea dinners' or quiet whispered conversations amongst hedge funds in the Hamptons, these kids have the courage to do it transparently in a forum," he said. "It proves this retail [investor] phenomenon is here to stay."

The Financial Times meanwhile, says "Reddit may be changing Wall Street in the way Twitter and Facebook changed politics."

What happens next?

The Wall Street elite obviously isn't too happy about the situation, and some are reportedly calling for new legislation that would make WallStreetBets' actions illegal.

As per the BBC, the White House and the SEC are both monitoring the situation with GameStop and the stock market.

GameStop isn't the only company WallStreetBets is focusing on as part of a "short squeeze" — the group has also set its sights on hedge funds in short positions against AMC Entertainment, Koss Corp, and BlackBerry.

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The battle continues between elite Wall Street fund managers and online investors organizing on Reddit.

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