Podcast

BONUS: How Robinhood Investors Caused GameStop Stock To Skyrocket

Dark Horse CPA

It’s a phenomenon that big money is trying to shutdown. Watch this video to learn how a group of retail investors organized in a subreddit named WallStreetBets to take on institutional investors who were betting on the stock price going down, and made them pay dearly for it.

Podcast Transcript

Gamestop is up nearly 750% in less than a week. And we all know it’s not because they’re the  new hotness as a company, but rather as a stock, this is an absolute phenomenon that the  market as a whole is struggling to come to terms with this was like a run on a bank, except  most people profited in a small number, lost big. 

It was a combination of disposable cash, freed up by stimulus checks,  unemployment insurance, and reduce living expenses, meeting an existential crisis that led a  younger generation to quell their boardroom and the forums of Reddit where an idea was  born, that would not have gained traction unless people had nothing else to do. 

Then you throw in FOMO and just fear in general. And you have stocks surging to  unfathomable levels. It turned out to be a watershed moment that arguably eclipse, the  hysteria that surrounded the collapse of Enron, something huge happened today and  whatever its impacts are, will be with us for a long time. 

So how did we get here? And where are we going? Well, it all started on the  subreddit wall street bets, a group of board and bullish Robinhood investors got together to  take on the establishment. And it’s almost too perfect that a lot of this activity occurred on  Robin HUD’s app, as this became the new age, stealing from the rich to give to the poor, the  central narrative behind the original Robin hood. 

In all fairness, the aims of these investors was far from charitable, but they have  leveled the playing field in an unprecedented way. So how did they do it? Essentially the  identified a stock that was a household name I E GameStop that had an incredibly high level  of short interest in it in a reasonably low market cap so that their fevers collective buying  initiative would push the stock price up substantially. 

So many people don’t understand what it means to short a stock other than it  means you’re betting against the stock price. So the way that the fat cat hedge funds  typically short a stock is by borrowing the stock from their broker, which they sell at the then  current price with the hopes that they can buy the stock back later on at a lower price to  return to the broker. 

So the difference between the price they sold the stock at originally versus what they buy it back at is the profit or loss that they realize on the transaction. So how did this  play into the hands of the Robin hood army? Well, the problem with shorting a stock is that  when the price goes up, you’re losing money because you’ll have to buy the stock back at a  price that is more than what you sold it for. 

And not only are you starting to worry, but so as the broker who lent you the  shares after all, they want to be repaid in full with interest on their loan. So at a certain  point, when they feel like your ability to return, the shares is quickly diminishing. They 

demand that the shares be returned now, which means you have to buy the shares back  right now to return to them. 

But as we discussed before, when there’s more demand to buy shares than to sell  surprise, surprise, the stock price goes up. And the problem is that as the price goes up more  and more people are either forced to cover their position or they lose their nerve. Since  losses are theoretically unlimited for short sellers, this my friends is what the biz refers to as  a short squeeze. 

As in the short sellers get squeezed into liquidating their bears transaction. The  result is a stock price that explodes as fear, breeds, fear for sellers and greed breeds greed  for buyers. Seeing the price skyrocket. It’s truly a powder keg. So where are we headed?  Now? These investors in droves, more who witnessed the success of this strategy are  hunting down stocks that have low market cap and substantial short interest GameStop  reveal the playbook, the template for which to replicate to the demise of anyone caught  holding the bag in terms of short interest, they are losing and they are losing big, but don’t  forget. 

Most of these companies kind of suck, which is why people are betting against  them. So when these valuations balloon, the retail investors who are too late to the party  will lose and lose big as well. The winners will be those at the top of the pyramid scheme  and maybe Ponzi scheme is the better analogy. 

Since the profits for the majority of retail, investors will come from those who got  to the party late. So long as the investor leaves the party before the cops break it up.

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