How r/WallStreetBets Made GameStop's Stock Price Soar: Reddit Takes on Short Sellers - TLDR News

[Music] hello and welcome to another tldr us video in 2021 it's hard to believe that a brick and mortar game store would see its stock prices rise even during a pandemic when people are trying not to go outside it's possibly even harder to believe that this huge spike in stock price will be driven almost entirely by a reddit community so in this video we're going to explain how wall street bets broke the stock market and in some ways prove the experts wrong if you're one of these people who's watching but not subbed yet then please consider subscribing the channel to get more updates on us news and politics also if you're interested in news around the world then check out the new tldr global channel where we're going to discuss a whole bunch of international issues the link to that's in the description before we get into this a quick disclaimer we're not going to be able to explain all of this in super fine detail so before you leave an angry comment about how we didn't explain what a margin call is or the precise details of gamestop's third quarter earnings report then just be aware that we're doing it in as much detail as we can so where do we start well there's basically three things you need to understand to get this story the subreddit wall street bets gamestop and a basic understanding of the stock market if you use reddit you've probably seen the occasional post on your front page from the subreddit wall street bets basically wall street bets or wsb is a subreddit about investing in the stock market it started off pretty niche but now has about 2 million subscribers i don't think the wsb community would mind me saying this so i'll say it but it's a bit of an insane community not in a bad or a good way necessarily it's just full of edgy memes and confusing lingo gamestop is a company in the us that sells video games and that's about all you need to know about it and finally the stock market the main thing you need to understand here is what shorting is shorting is when you think a company is going to do badly so you borrow that company stock from a broker and promise to pay them back later to use a non-stock market example imagine that i thought that apples were going to go down in value let's say they currently cost one dollar i go to a shopkeeper and say hey can i borrow an apple off you i'll pay you back an apple later i borrow the apple from him and sell it to someone for one dollar and then wait for the price to change if the price goes down to say 50 cents then i can buy a new apple for 50 cents and return it to the shopkeeper he's got his apple back and i've made 50 cents in stock market terms i would have shorted apples now replace those apples with stocks and you hopefully get the idea there's two other things worth mentioning about short positions first you have to pay an interest rate on your short positions because after all you're borrowing something second short interest can be greater than 100 of available stock for example imagine we've only got one apple i could borrow that apple from my shopkeeper and sell it to another shopkeeper then someone come along and borrow that apple off the other shopkeeper and sell it back to mine now we're back where we started with one apple in the hands of my shopkeeper but two apples owed to the shopkeepers alright that's enough detail for the moment let's start this story in 2020 gamestop is a brick and mortar video game company after the coronavirus hits gamestop unsurprisingly has a couple of bad months and revenue falls and at the same time gamestop stock price falls to about four dollars a share now largely because of this there's a lot of big international investors that thought gamestop was essentially going to go bust and do a blockbuster so they shorted gamestop stock hoping to see it collapse however what they didn't see was that there was some good news coming gamestop's way firstly in mid-august ryan cohen the founder of chewie started buying shares in gamestop by december vc ventures cohen's company had bought about 9 million shares so 13 of gamestop then in january cohen the founder of chewie alan atau the previous ceo and cmo of chewie and jim grube the previous cfo of chewie were all appointed to gamestop's board basically it looks like cohen has decided to get involved with gamestop and as a billionaire who made most of his money from chewie an online pet food retailer it looks like gamestop have a big advantage they've got a billionaire investor who's experienced with running ecommerce companies which is exactly the business model gamestop needs to shift to secondly in november the ps5 and xbox series x were released marking the beginning of a new console cycle which is always good news for gamestop thirdly gamestop signed a deal with microsoft which gave them a share of all of xbox's digital revenues so good business news for gamestop but what about the stock well over this period it seems that two important things happened firstly the institutions that shorted gamestop stock decided to buy up more short positions to try and defend their original shorts basically they saw that things were on the up for gamestop so to try and suppress the stock price they actively shorted more this chart seems to show for example that on january 11th there are massive 4 million short positions taken despite the fact that this was the day that cohen's board appointments were announced anyway in total there were 71 million short positions taken now gamestop only has a float of 69.75 million shares remember you can have more short positions than actual shares total but it gets crazier because about 20 of gamestop shares are held by insiders like cohen now insiders can't sell easily because of regulations so those shares aren't normally up for grabs there's also about the same amount again owned by big institutions who don't normally actively trade either so that leaves between 20 and 30 million actively traded stocks and 71 million short positions who all need to buy stock that's a lot of demand and not much supply anyway wall street bets realized this and determined that if they bought the stock and held it they could force the price up this triggers what's known as a short squeeze where people with short positions desperately buy into a stock and try to cover before the price gets too high they're trying to buy up apples to return to shopkeepers before the price gets even higher these people are losing money but covering now prevents them from losing even more but when there aren't enough stocks to go round this forces the price to jump spectacularly and remember it costs monies a shorter position forever because of interest so they want to act fast and this is exactly what happened with volkswagen in 2008 where it briefly became the world's most expensive company and so that's exactly what gamestop investors did again gme stock went up from dollars in september to twenty dollars in december to forty dollars in mid-january to a ridiculous a hundred and fifty dollar peak yesterday ultimately people on reddit made a lot of money and short sellers lost big two big names in this are andrew left who run citroen research and melvin capital left claimed that gme would collapse to twenty dollars when it was at forty and put out a youtube video with his reasoning he was wrong melvin capital is a fancy hedge fund that had a short position on gme and yesterday it had to be bailed out by some other big institutions which clearly isn't good for them now two last things firstly it's unclear whether the short squeeze has fully happened yet there are still a lot of short positions to be covered but no one can be sure how this is going to pan out whether there'll be enough liquidity to allow shorts to cover around the current price or if the diamond hands will hold and force the price up yet again secondly if you've seen anything about this in the news it's often spun as mental reddit investors ruin the market now there's kind of three things worth saying here firstly wall street bets doesn't actually hold much sway over the market itself as wsb is an internet forum not an institution secondly it's not as if the market was rational beforehand it's just that only hedge funds used to be able to manipulate it and this wasn't even clear manipulation obviously some of gme's rise is a function of speculation but there's a good argument that it was undervalued and over shorted to begin with thirdly it's fundamentally a good thing that people are able to get into the stock market and make money off gme it might make things more volatile and harder for hedge funds but crimea river wall street what do you think about this whole situation and the possibility that the internet can beat out big time investors let us know your thoughts in the comments below be sure to subscribe the channel and hit the bell icon to be notified every time we release a new video special thanks to our patreon 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Channel: TLDR News US

Views: 1,777,607

Rating: 4.9228945 out of 5

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Id: sH_F7mQIM0M

Length: 9min 50sec (590 seconds)

Published: Tue Jan 26 2021

Reddit Comments

[u/Jbaquinones]

Really cool video. Thanks. The apples example really help me understand.

[u/jolly_good_old_chap]

Starts at 1:30