Treasury Secretary Janet Yellen is now making her first public effort to step in and deal with the GameStop stock volatility.
Only those who have actively detached themselves from digital society may be unaware of the recent GameStop stock madness – which has made it beyond the realms of the financial papers and made global news headlines. Now the US government has gone public and decided to step in. The US Treasury Secretary Janet Yellen will this week meet with US financial regulators to discuss the recent financial market volatility, which has largely been driven by the GameStop stock frenzy.
GameStop Stock Frenzy Explained – Retail vs Professionals
It all started with a Reddit thread. The Covid-19 pandemic has led to a home trading surge , meaning everyone from your vegan millennial to the blue collar everyman has been picking up their laptop and buying stocks. This has led to an increase in social media trading discussion on platforms including Twitter and Reddit. These people are known as “retail investors”. In the other corner, you have professional investors, who had largely dismissed the casual stay-at-home retail investor – until March 2020, that is.
The stay-at-home-millennial brand of retails traders started discussing things on a Reddit thread called WallStreetBets, essentially with the aim of ‘let’s irk the greedy Wall Street elite’ – and they succeeded, but how? The retails traders, egging each other on via Reddit threads, started to buy up stocks that big hedge funds had shortened, thus resulting in the big hedge funds incurring heavy losses. They did this with several shortened stocks, with GameStop being the most notable.
How Does Short Selling Work
Without going into detail, short selling involves betting that a stock price will drop, and if it does – the short seller stands to make a lot. What the retail investors have done with multiple short sold stocks is bought them up in droves, thus driving the stock prices up – meaning the professional Wall Street-ers lose their bet.
The hedge funds short-sold the GameStop stocks for the obvious reason – the retail chain wasn’t projected to survive in the online world of 2021. The retail investors used reddit in order to pull off a large-scale short squeeze, which resulted in the stocks increasing over 20x their value.
Why Does The Government Have To Step In?
Government intervention is thought to be essential for a number of reasons. Firstly, there’s the problem of overvalued stocks in an economy that’s been badly hit by the Covid-19 pandemic. Should the markets take a turn for the worst, as they very well could then the bubble of overvalued stocks will most definitely burst along with them. Secondly, there’s the power play on behalf of the hedge funds, who are essentially dismissing these retail traders as a bunch who are jumping on the bandwagon and will lose interest eventually. There are many who believe this could backfire, and politicians will also have to look into the dodgy short selling strategy of the Wall Street hedge funds.