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Take Stock of Your Stocks

Buy stock in adorable! The value is sure to go up!

By now I expect you all know me fairly well. You know I’ll jump at any chance to point out the failures of late stage capitalism, and normally I would LOVE to tear economic policy a new one over the whole GME (Gamestop Stock) debacle. But something bothers me about the whole situation. Specifically, more than tearing late stage capitalism a new asshole, I want my anger and vehemence coming from a well informed position. Otherwise we risk becoming crazy conspiracy nuts that jump at anything that even vaguely sounds like it supports our position. And, I’ll be the first to admit, I have no clue how any of the financial sector works. Fortunately, I have friends who’ve spent a good chunk of their adult lives working in finances and after interviewing them at great length I feel like I can give you my (the layman’s) understand of what happened, and whether the anger towards Wall Street is justified. Oh, just a note to protect my friends: they gave me no financial advice (official or otherwise) on how to profit from, minimize losses, or otherwise interact with the Gamestop stock situation. I don’t currently own any shares of GME, nor do I intend to in the near future.

 

Of course we’re going to start with our favorite part: defining terms! This is really important in this situation because, at least in my case, I kind of knew what a lot what the terms generally meant, but not an actual working definition, and certainly not enough to understand how these different things are interacting with each other. Ready? Here we go:

1. Company – For our purposes, a company is an independent fiscal entity. Yes, there’s a much more exact and complex definition involving employees, product, business plans, etc. But none of that’s important to our understanding of the situation. You just need to know monetarily, a company is its own thing. It has its own income, expenses, bank account, and taxes all separate from its employees and owners.

2. Stock – Partial ownership in a company. If you own a piece of stock you effectively own a small portion of the company. It should be noted that the average start-up issues around 10,000,000 shares of stock. Larger more established companies usually have more, so when I say “small portion” I mean it. 

It should also be noted that stocks, in it of themselves don’t do anything. You can’t spend them, you can’t eat them, wash them, put your drinks on them, or let your cat play with them (okay, technically not true, if you, for whatever reason, have the physical piece of paper that represents a share in a company you can totally do most of those things. You shouldn’t, but you can). For the most part a share of stock just kind of exists. There’s a very small number of companies that will give a portion of their yearly profits to the owners of their stock, but those aren’t really applicable in this situation. Mostly people make money from stocks by either selling them, or holding onto them until the company decides to purchase them back. In that respect it’s probably best to think of stock like a loan that’s being passed around, you wanna be holding onto the loan when it gets paid back, but you don’t want to pay more for it than the loan taker is going to pay you back. 

3. Short Selling – This is confusing as hell, but it’s kind of using a stock as credit against itself. How the transaction typically goes is like this:

Person A owns, let’s say, 10 shares of a stock, which is doing very poorly.

Person B borrows the 10 shares from person A then sells the 10 shares at market value.

The influx of stock into the free market causes the price to drop.

Person B immediately turns around and buys 10 shares of the stock at the lower price.

Person B returns 10 shares of the stock to Person A, and usually a bit of money as a fee for the letting them borrow 10 shares of the stock.

Person B pockets the remaining cash. 

4. Hedge-funds – Another really confusing term. From what I’ve been able to tell a ‘hedge-fund’ is when a fund manger and an investor (or a group mangers and investors) pool their resources to create a fund that is supposed to make money by aggressively making use of multiple investment avenues and strategies due to the lowered regulation surrounding them. This is in contrast from other funds that are much more tightly regulated and are generally only capable of doing one type of investment. Ironically, the allowed use of multiple revenue streams is supposed to make them safer (since they can use income from one investment to cover the cost of starting another investment, or ‘hedge’ your bets), but most financial experts seem to consider hedge-funds higher risk. 

5. Gamestop (Or GME) – GME is the shorthand for the Gamestop stock, so GME and Gamestop will be used interchangeably for this article. Gamestop is (or probably was at this point) a company that dealt in the buying and selling of video games. They did not produce, develop, or publish any games. They were simply a retail outlet for video games that also created a secondary market for people who wished to buy or sell used game. Since the rise of digital distribution methods (Steam, Epic, Nintendo Store, etc) Gamestop has been dying a slow death. 

6. r/wallstreetbets (or WSB) – A sub forum on the reddit website that focuses on users giving each other advice on how to make money via trading of stocks.

 

Got all that? Cool. Feel free to either refer to the above, or look up more in-depth definitions and let me know if I need to correct or change anything.

So what the heck happened?

Well, Gamestop, being on its last legs due to being unable or unwilling to adapt to gamers no longer needing physical copies of games (or having other, less awkward places to get physical copies) was an obvious choice for hedge-fund managers to begin short selling GME shares. Normally, what would happen is the Gamestop stock owners would either make a small profit, or recover some of their losses for owning stock in Gamestop. The hedge-funds would make a tidy profit and the Gamestop would declare bankruptcy putting all its employees out of work.

What happened instead is that r/wallstreetbets sniffed out an opportunity and made a concerted effort to get as many of its members as possible to buy as much Gamestop stock as possible. Now, it’s important to remember that the stock market doesn’t function like any other market on Earth. It’s far more volatile and subject to the forces of supply and demand than any other market. If there’s a shortage of apples I don’t have to worry about the price of apples going up while I’m at the store. Not true with stocks. If there’s a run on GME then the price of that stock is going to be going up even as I’m desperately mashing the ‘buy’ button on whatever stock market client I’m using. This means the surefire short sells were suddenly not only not making money, but were actually costing hedge-funds money. They not only didn’t make a profit rebuying the stock at the lower price, but they now owed the original owners of the stock the shares of stock (plus the small fee for allowing them to use the stock in the first place).

Again, normally the hedge-funds could just sit on the shares until the market value stabilized, but in most short sell cases the original owner of the stock can exercise a recall of the stock they lent out whenever they want (like say the price of the stock reaches something absurd, like five hundred dollars). That means the hedge-fund now has to buy the stock at the higher price so they have the stock available to give back to the original stock owner, which just further drives up the price.

All of this culminated into several online trading platforms temporarily not allowing the buying and selling of GME (and other highly volatile stocks). This led to an outcry from many people, who were citing it as an example of how the rich follow one set of rules and the poor follow another. 

And since this has now become political issue instead of an economic one I’m going to chime in. First of all, is halting the trading of specific volatile stocks the rich pushing back against the poor in the forever class war? Actually, no, no it’s not. From what I’ve been told (and later read) what was happening was the trading was becoming too frenzied and out of control and brokerages HAD to stop trading or they’d risk either making an incorrect trade or being unable to fill all necessary orders (which is in itself actually quite complicated). Having that happen would have cascaded into further problems down the line so this was kind of a safety thing. As much as money isn’t ‘real’ having incorrect values for huge sums of money amongst multiple people would cause society a lot of problems.

Second, is what hedge-fund managers do market manipulation? Yes, of course it is, they’re carefully buying and selling huge volumes of stock in such a way that allows them to always ‘win’. But so is what r/wallstreetbets did. My main concern is that there’s a narrative going around that r/wallstreetbets are the ‘good guys’ and the hedge-fund managers are the ‘bad guys’. Well, I’m here to tell you they’re both bad guys.

R/wallstreetbets is explicitly there to try to get its users money. They didn’t start a take over of Wall Street movement to show off the inherent flaws in our broken system; they found a chance to exploit a flaw for profit and jumped at it. Now they’re just riding the narrative of being “the common man” to garner public support. In fact, what they’re doing is actually more irresponsible than what hedge-fund managers do; yeah they’re manipulating the market, but at least they’re trying to manipulate it in predictable ways. As of writing this the current position of r/wallstreetbets is to hold onto the GME shares. Great, except shares of stock don’t DO anything unless you trade them. So now they’re all caught in Schrödinger’s trade, their stock is only valuable as long as they’re holding onto it. As soon as they start selling the price is going to start to drop, and unless they can do an extremely coordinated and careful selling off of the Gamestop shares a lot of people are going to be left holding worthless shares that cost them over three hundred dollars per share. 

This is like watching two kids in a knife fight. Your reaction should not be, “Well, I’m rooting for the kid on the left cause he hasn’t had his knife for as long and I always root for the underdog.” Your reaction should be, “Holy fuck! Somebody take those knives away from those kids! We need to find a way to stop kids from getting unsupervised access to knives.”

 

Here’s my takeaway from the whole clusterfuck, and hope it’s what the rest of you takeaway:

1.) The stock market requires much tighter regulation. It’s been abused by the ultra wealthy since its creation, and the fact that a bunch of ‘common’ people can abuse it should evidence on just how terrifyingly broken it is. For whatever reason the majority of the populace have decided the stock market is a benchmark for the well being of our economy. Well, if that’s the case then it needs to be a functioning benchmark, not the playground of the ultra-rich where they always win at the expense of everyone else.

2.) The stock market is pretty divorced from what’s happening on the ground level. Gamestop, as a company, despite having shares traded at around five hundred dollars at the peak of this mess didn’t make any money, and still won’t. All of that was between hedge-fund managers and the folk at r/wallstreetbets, Gamestop didn’t see a dime of that action. They’re still a failing company (or a failed company) with a business model fifteen or more years behind the technological times. Fundamentally, none of this changed a thing for the real common person.

3.) Spectacle makes people forgot what’s actually happening. All this ‘r/wallstreetbets versus hedge-fund managers’ thing is a spectacle. It might be the thing we need to enact some actual, much needed change in the stock market, but none of it changes the core fact that Gamestop is a failing company and unless the CEO can magic a functioning business plan out of their ass it’s going to go bankrupt. And you know what I haven’t seen a single article address? What’s going to happening to all the low level workers when that happens. Why the people who need a functioning safety net the most don’t have one. The single parent trying to sell Gamestop’s over priced shit doesn’t care about the value of the stock, it’s not like they had the spare money to invest in it. They’re busy trying to find a new job in an over saturated market since the company they’re working for is about to go under and ‘compensation’ is more than likely going to be a hearty digital handshake and faux “thank you for your hard work!”

Our society is broken well beyond what the stock market is showing. Don’t let two groups of sociopaths fighting over who gets to abuse the system more make you forget that. 

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