Even if you're not into investing, chances are you've heard about how a group of redditors
have driven up the stock price of the venerable GameStop GME in order to troll a bunch of
hedge fund managers. Although this is tech-quickie, not cash-quickie, we are going to give you a brief synopsis
of the situation for some context and then talk about the tech side of things to better
understand how this happened. So the reason GameStop was targeted was because it's a heavily shorted stock.
Shorting a stock is a high risk but potentially high reward play that works like this.
You pay a fee to borrow a stock from the owner, then immediately sell that stock, like that
day. You do eventually have to return the stock to the owner, so by shorting it, you're betting
that the stock will go down in value, allowing you to buy it back later for cheaper than
you just sold it for, giving it back to the original owner and keeping the difference
in the price you sold it for and the price you bought it back for, minus fees and interest.
GameStop is often shorted because with video game distribution becoming digital, GameStop's
more brick-and-mortar business model has seen as something that could fail in the near
future, you know, kind of like blockbuster.
But as we said, shorting is very risky, since if the stock's price goes up instead of down,
you have to buy it back for more than you originally paid for it, sometimes a lot more.
And as more and more people buy back a shorted stock because they're panicked about the
price rising even more, it just keeps driving the price up even more.
Because of this risk, stock shorting has become associated with hedge funds, which typically
make high risk but potentially lucrative investments for organizations or for wealthy
individuals. And some of the risky plays they've made have hurt the US economy, meaning that they're
not very well liked. Combine that sentiment with a feeling that GameStop might be undervalued and the rush
was on to buy GameStop shares, drive up the price, and force short sellers to buy the
stock back in a panic, making GameStop an even more lucrative investment, at least for the
short term. Okay, so we've explained a bit about how short selling works, but how were a bunch
of individual investors on Reddit able to beat these powerful hedge funds with millions
dollars even bankrupting one of them? A huge part of it is how online services and apps have made investing far more accessible.
Instead of calling up a broker and using traditional trading software that assumes the user is already
familiar with investing, newer financial tech, or fintech firms such as Robinhood, which
we'll talk about more in a little minute here, have tried to make opening up investing
to the masses with easy to understand interfaces a core part of their business models.
There are also companies that specialize in what's called robo-advising, an algorithm-based
approach to investing for those who don't know much about investments or simply don't
want to have to manage the details themselves. Typically, you tell a robo-advising service such as Betterment or Wealthfront what your
investing goals are and how much risk you're willing to take on.
And then the algorithms invest your money for you, rejiggering things on the fly depending
on what the market's doing and oftentimes even making tweaks that can reduce your liability
come tax time. Robo-advisors also have cheaper fees than traditional brokerages due to lower overhead,
helping these services take off big time over the last few years, with many managing tens
of billions of dollars in combined assets.
And even though the aforementioned Robinhood doesn't offer robo-advising, it's easy interface
and no commission trades have made it very popular.
But you might also have heard that Robinhood has had a lot of ire directed at it recently.
After the game stopped short squeeze we described, Robinhood made the decision to restrict trades
involving GameStop stonks, as well as other stocks redditors were targeting.
Robinhood reportedly did this to limit its own risk in the event GameStop's price collapsed.
But the move was extremely unpopular, triggering lawsuits, accusations from investors that they
were colluding with hedge funds, and even statements from both Republican and Democratic
politicians wondering why hedge funds were able to trade securities that individual investors
suddenly couldn't. Wow. It looks like activist investing actually did something.
I wonder if we can rally tech quickies fanbase to pump up the value of lttstore.com, but first
we need to go public. So thanks for watching guys, if you liked this video hit like, hit subscribe, and hit
us up in the comments section with your suggestions for topics that we should cover in the future.