7/24/24 The GameStop Scandal(Meme Stock Phenomenon)
Updated: Jul 25, 2024
Last week I said I was going to talk about trending stocks, but I've recently found something way more interesting. Meme Stocks. Specifically the Gamestop Situation.
To deepen our understanding of this concept lets learn some new vocabulary!
Options: a type of contract that gives the buyer the right to buy or sell a security at a specified price at some point in the future. (Investopedia)
Calls: an option contract that gives the holder the right to purchase stock at the strike price in other words, a contract between a buyer and seller that gives the buyer the right to purchase 100 shares of the underlying security at the specified strike price.(Projectfinance)
Puts: An option contract that gives the holder the right to sell stock at the strike price. A put option is a contract between a buyer and seler that gives the buyer the right to sell 100 shares of the underlying security at the specified strike price.(Projectfinance)
The GameStop Situation
Now that we know those words lets get into the history of GameStop first. In 2021 it was steadily declineing and many stores were closing for a while. It had failed to find a buyer for the firm 2 years earlier and the stock was failing. But where many saw a pile of trash, a few investors on Reddit's WallStreetBets forum saw a potential fortune in Gamestop. Alas, Wall Street as well as hedge funds deemed that GameStop was being overvalued and began shorting the stock(buying the stock to sell and then rebuying in hopes that the price would fall, effectively making profits.) Members of WallStreetBets took this oppurtunity and bought and held on to GameStop stock to rocket the price upward, forcing hedge funds to buy the stock at a much higher price, costing them a staggering $19.75 billion in less than 2 weeks.
Eventually, the stock plummeted straight down going from a peak of $500 dollars a share to $50 in a week. Now, the controversial action about this situation is what the popular trading app Robinhood did next. On January 28th, they restricted the purchase of GameStop, effectively lowering the price of the stock. This decision is controversial since in seems to many that Robinhood was protecting the billionare hedge funds while Robinhood had been marketed as accessible to all investors especially small retail investors. What really happened here?
In conclusion, I do believe that there may have been some shady bussiness conducted between the hedge funds, Robinhood, and possibly even with the government. Maybe with the aim to take down this meme stock frenzy. Is the economy rigged? We may never know.
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