Very Simplified Description of What Happened this Week with GameStop Stock

So take stocks. You know how they work. You buy one. It goes up or down in value. When you sell it, you make or lose money. That’s it.

Then you have mutual funds. They combine a lot of stocks together so investors don’t have to manage a thousand stocks. They just buy one mutual fund. Mutual funds are combo meals.

Then you have hedge funds. They do a lot of what mutual funds do, but they do more creative and aggressive things too. One of them is short selling.

What is short selling? Let’s say you think a stock’s value is going to go down. You can’t make money by buying the stock anymore. So you sell shares you don’t have, hoping that when the buyers show up to collect, you can buy the stock for less than you sold it.

Let’s say you knew bagels went stale but everyone else disagreed. You’d simply sell today’s fresh bagels with a delivery date of one week from now. Before delivery, you’d buy week old bagels at a severe discount. You’d pocket the money. That’s short selling.

Is short selling bad? Depends on who you ask. Many people think it’s dangerous for powerful interests to be rooting for the value of stocks to go down. And it can be. But sometimes stocks SHOULD go down. Short sellers helped expose Enron. Short sellers help expose pyramid or Ponzi schemes when others don’t have a financial interest to do so. If the world things bagels don’t go stale, maybe it’s good to teach them that lesson. Then maybe they’ll stop overspending on stale bagels.

Anyway, a group of investors surfing an internet message board on Reddit noticed a LOT of major hedge funds were short selling GameStop. That’s the store at the mall that sells video games that you assumed went out of business ten years ago. There was so much shorting of GameStop that the number of shares sold short exceeded the total number of shares in the business. That’s a lot.

So tens of thousands of individual investors decided to do something. They hatched a plan to “squeeze” the short sellers by buying up shares of GameStop and holding on to them. Lots of people. Lots of shares. So they did. And the stock price went up. And up.

Soon some hedge funds needed to buy GameStop shares to cover their short sales. They owed their customers stale bagels. So they bought shares, but at an inflated price. Sucks to be them. The stock kept going up.

More hedge funds had to buy shares to make good on their contracts, some with the very same message board people working to destroy them. So they kept buying shares. And losing money. Tons of money. And the buyers weren’t selling the shares. They were holding onto them. That was all part of the plan.

Is this market manipulation? You bet it is. Is it bad? That’s a big and complicated question. When powerful hedge funds or billionaires do this it’s considered market manipulation, even without inside information. But we’re talking about hundreds of thousands of individual retail investors, spending a few hundred bucks each. Are you going to go after each of them? For what? And unlike the single market mover playing with billions of dollars, these guys can afford to make bets on spite alone. Let’s say the whole thing failed, and they each lost a few hundred bucks. Is that tragic? Not really. It’s a very satisfying weekend in Vegas.

What does this mean for GameStop the business? Nothing. It’s still doomed. Sorry.