Confused about everything going on with GameStop's stock right now? How did a dying company suddenly gain 10 billion in value overnight? What even is a stock? Let's start off with a quick definition:
Stock: The fractional ownership of a company.
Still confused? Let me rephrase, when you buy stocks of a company, you've bought an ownership of that company. If you bought 50 shares of a company, you have a part ownership of that company. This only means that you own a small part of the company, not their assets.
Usually, people hope for the per share price to go up, in which case they can sell their shares and make a profit. You usually buy stocks at a low price, hoping for the company to grow, and for the share price to increase. However, if you think the stock price is going to decrease, you can short a stock, which is selling stocks that you don't own at a high share price, and paying for them later, when the stock price is lower. This can be risky, because if the price rises, you'd be losing a lot of money. Large hedge funds were shorting GameStop stock, believing that the price would decrease.
Traders on Reddit saw this as an opportunity to buy the stock, driving the price up. When the demand for a stock increases, so does its price. This is called a short squeeze. Buying a lot of shares increased the price of GameStop stock, and this is where large hedge funds started to lose billions.
Robinhood and other major trading brokers began to limit the the trading of GameStop, which drove down the price again.
Melvin Capital, a hedge fund shorting GameStop stock, needed an injection of 2.75 billion, and Citron Research closed their position at a loss of 100%. All of this doesn't just end here, it also affects other investors. In order to pay back the price of the shares, these hedge funds would have to sell some of their other shares in other companies, leading to a price drop in the share price in those companies. Other investors with investments in those companies could see losses, regardless of whether they ever invested in GameStop.
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