Trying to understand the gamestop situation is making my head spin.
I need a better understanding of finance.
This page is a permanent link to the reply below and its nested replies. See all post replies »
Northwest · M
Let's see if I can describe this at a high level.
I have 1,000 shares of GameStop. I bought them at $4 each.
GameStop is valued at $10.
ACME is a hedge fund. They did some research and think GameStop stock is going to tank due to difficulties the company is having. They think it will be trading at $4 in 3 months.
ACME contacts me, through my broker and ask if I would be interested in letting them borrow my 1,000 GameStop shares, for a fee of $1 per share, for a period of 3 months.
I agree. ACME pays me $1,000. In return for that, I hand them over my 1,000 shares of GameStop. The "buy on borrow" stipulates that ACME can now do whatever it wants with my 1,000 shares, as long as they will return them to me by the agreed upon date, which is 3 months from now.
ACME immediately sells my 1,000 shares for $10K.
In 3 months time, the stock is now trading at $4 per share. ACME buys 1,000 shares and return them to me.
ACME made $6 minus my $1 fee, or $5 per share. That's annualized to 400% return on their investment. Pretty good deal.
ACME is taking a risk. If in 3 months, GameStop is trading at $12 per share, then they would have to buy 1,000 at $12 per shares to return to me. They sold it for $10 and they're now buying back at $12. A loss of $2 per share, add to that the $1 they paid me, that's $3 per share, annualized to a 300% loss on their investment.
Now for what specifically happened with GameStop.
The hedge fund bought on borrow every single GameStop share it can get its hands on, let's say for an option price of $3 per share. Not share what the commission was, or the length of the contract.
They turned around and sold it all for $10 per share.
This other group (Robinwood, Reddit investment group, etc.) figured out what's going on, waited until the hedge fund is deep into it, and started bidding up GameStop stock. The price of a stock is based on how much you're willing to pay for it.
They were counting on enough people getting in on the pyramid scheme, to continue driving the stock price up. Within a matter of days (between Jan 12 and Han 26), the stock went from $10 per share, to $370 per share.
In the meanwhile, the hedge fund figured out what's going on, and went hyper trying to cut its losses, by buying all available shares at market price, so if on that day, the price due to overbidding is $120, then that's what the hedge fund paid for it. In the meanwhile, Robinwood, etc. who bought it at say $15, made an instant $105 per share profit. And this thing went on and on, until the hedge fund was able to buy enough shares, to return at the end of the contract. When the dust settled the price was $370 per share.
Remember that as supply shrinks, as in shares are taken out of circulation, the price goes up.
It's a dangerous game for all parties. This time around, the hedge fund was on the losing end of things. But if their math is a bit off, then those who entered the market at $370 per share, and did not have buyers (as in the hedge fund had already purchased enough shares to return them per the original contract), then you're now stuck with a loss, when the stock starts shrinking back to what it's actually worth: $10, and eventually it will.
By the time it was over, if you were part of the anti hedge fund group, then you entered at the top of the market, and you did not make money. If you entered earlier on, then you made more money. So, it's kind of a pyramid scheme, and why I have no respect for all parties involved.
Also turns out Robinwood drew on credit lines from banks, so they're not practicing what they're preaching.
I have 1,000 shares of GameStop. I bought them at $4 each.
GameStop is valued at $10.
ACME is a hedge fund. They did some research and think GameStop stock is going to tank due to difficulties the company is having. They think it will be trading at $4 in 3 months.
ACME contacts me, through my broker and ask if I would be interested in letting them borrow my 1,000 GameStop shares, for a fee of $1 per share, for a period of 3 months.
I agree. ACME pays me $1,000. In return for that, I hand them over my 1,000 shares of GameStop. The "buy on borrow" stipulates that ACME can now do whatever it wants with my 1,000 shares, as long as they will return them to me by the agreed upon date, which is 3 months from now.
ACME immediately sells my 1,000 shares for $10K.
In 3 months time, the stock is now trading at $4 per share. ACME buys 1,000 shares and return them to me.
ACME made $6 minus my $1 fee, or $5 per share. That's annualized to 400% return on their investment. Pretty good deal.
ACME is taking a risk. If in 3 months, GameStop is trading at $12 per share, then they would have to buy 1,000 at $12 per shares to return to me. They sold it for $10 and they're now buying back at $12. A loss of $2 per share, add to that the $1 they paid me, that's $3 per share, annualized to a 300% loss on their investment.
Now for what specifically happened with GameStop.
The hedge fund bought on borrow every single GameStop share it can get its hands on, let's say for an option price of $3 per share. Not share what the commission was, or the length of the contract.
They turned around and sold it all for $10 per share.
This other group (Robinwood, Reddit investment group, etc.) figured out what's going on, waited until the hedge fund is deep into it, and started bidding up GameStop stock. The price of a stock is based on how much you're willing to pay for it.
They were counting on enough people getting in on the pyramid scheme, to continue driving the stock price up. Within a matter of days (between Jan 12 and Han 26), the stock went from $10 per share, to $370 per share.
In the meanwhile, the hedge fund figured out what's going on, and went hyper trying to cut its losses, by buying all available shares at market price, so if on that day, the price due to overbidding is $120, then that's what the hedge fund paid for it. In the meanwhile, Robinwood, etc. who bought it at say $15, made an instant $105 per share profit. And this thing went on and on, until the hedge fund was able to buy enough shares, to return at the end of the contract. When the dust settled the price was $370 per share.
Remember that as supply shrinks, as in shares are taken out of circulation, the price goes up.
It's a dangerous game for all parties. This time around, the hedge fund was on the losing end of things. But if their math is a bit off, then those who entered the market at $370 per share, and did not have buyers (as in the hedge fund had already purchased enough shares to return them per the original contract), then you're now stuck with a loss, when the stock starts shrinking back to what it's actually worth: $10, and eventually it will.
By the time it was over, if you were part of the anti hedge fund group, then you entered at the top of the market, and you did not make money. If you entered earlier on, then you made more money. So, it's kind of a pyramid scheme, and why I have no respect for all parties involved.
Also turns out Robinwood drew on credit lines from banks, so they're not practicing what they're preaching.