The GameStop, Reddit and Robinhood saga, simplified

An investment story has been doing frantic rounds on social media, leaving a lot of people very confused as they get whiplash trying to follow heated exchanges that include GameStop, one subreddit and a Robinhood. 

Some people say the GameStop saga is analogous to DVD rental company Blockbuster slowly going bust after Netflix launched. 

The 'short' of it

GameStop, a firm that sells gaming consoles was going bust and big-name hedge funds bet on its stocks falling even more in the future, thanks to a boom in online video games during the pandemic. 

What was missing from the Blockbuster scenario was an online army of small, or day time, investors determined to defeat big bad Wall Street behind the epic bust of 2008.

Their weapon: free trading apps, one in particular – Robinhood. The individual investors bought a lot of shares using Robinhood, causing GameStop and other unprofitable stock to rocket. Big investors who bet on GameStop stock failing lost a lot of money, the very same investors whose business allows Robinhood to be free for smalltime traders. 

The result: Robinhood on Thursday turned against the people using its app to trade and closed the buying of GameStop and others.

READ MORE: Class action lawsuit filed against Robinhood online brokerage

Robinhood issued a blog post on Thursday entitled "An Update on Market Volatility," seeking to explain their decision and is facing a class-action law suit. 

But what’s going on with GameStop’s stock doesn’t make sense to a lot of people.

Here's a breakdown of the saga with more details and a look at how we got here:

📈What is happening with GameStop's stock?

It’s been maniacal this month. 

After sitting around $18 three Fridays ago, it doubled in four days. 

It kept shooting higher, before nearly doubling on Tuesday and then more than doubling again on Wednesday to $347.51. On Thursday, it gave back a chunk of those gains and finished the day at $193.60, down 44 percent. But it’s still up an amazing 928 percent through the first few weeks of 2021.

🎮 And the company itself?

It’s still struggling. GameStop, based in Grapevine, Texas, sells video games at more than 5,000 stores, and the pandemic has been keeping customers away. 

More worrisome is the long-term shift by customers away from brick-and-mortar stores and toward buying games online.

Enthusiasm has grown for GameStop’s prospects after the company said earlier this month that a co-founder of Chewy, the online seller of pet supplies, was joining its board. Investors see Ryan Cohen helping GameStop’s digital transformation. But analysts still expect GameStop to keep losing money in its next fiscal year.

READ MORE: Epic battle over GameStop as retail traders take on Wall Street

🤓 Is Reddit involved?

Yes, particularly those in a group called “WallStreetBets” or r/WallStreetBets subreddit.

Their discussions are full of ideas for the next big trade to jump on, self-deprecation and an appreciation of both winning and losing bets, as long as they’re bold. 

They’ve been encouraging each other to keep buying GameStop and push it ever higher, or “to the moon.”

“We broke it. We broke GME [GameStop’s stock market ticker] at open,” one Reddit user wrote on Monday after the NYSE halted trading.

Another Reddit user wrote in an open letter to CNBC: “Your contempt for the retail investor (your audience) is palpable and if you don’t get it together, you’ll lose an entire new generation of investors.”

The wallstreetbets page, added two million followers in the last 48 hours.

READ MORE: Reddit users rock Wall Street with GameStop stock rally

🤯 Reddit alone pushed the stock up more than 1,000%?

No. A big reason for that is how deeply hated GameStop’s stock was by hedge funds and other professional investors on Wall Street. 

Many were betting on GameStop’s stock to fall by “shorting” it.

🤑 What is a short?

It’s how investors can make money off a stock falling. 

If you sell a share at $10, expecting it to decrease and it falls to $5, you can buy it back at that price and pocket the extra $5.

In reality, investors borrow a share of GameStop and then sell it. Later, if the stock price does drop as they expect, they can buy the stock at a lower price and keep the difference. 

GameStop is one of the most heavily shorted stocks on Wall Street.

😖 What is a short squeeze?

It’s what happened with GameStop’s stock. 

When a stock is very heavily shorted, a rise in its price can force short sellers to get out of their bets. 

To do that, they have to buy the stock, which pushes the stock even higher and can create a feedback loop. 

As GameStop’s short-sellers have gotten squeezed this month, smaller and first-time investors have been egging each other on to keep the momentum going.

📴 What did Robinhood have to say about it?

Robinhood CEO Vlad Tenev says the app restricted trade in some stocks such as GameStop, AMC, Blackberry and others to protect the company and its customers.

Those stocks slid on Thursday, paring losses only after Robinhood eased the curbs on Friday.

"We understand our customers are upset, we're doing what we can to re-enable buying in these names," he said. 

"We want to be clear in the communications, and I own that we should have been out there a little bit sooner."

Tenev said Robinhood had tapped credit lines "so that we could maximise, within reason, the funds we have to deposit at the clearing houses," to facilitate more trade.

The app took a $1 billion infusion from backers, the Guardian reported.

The app now counts more than 13 million users.

☝️There was also confusion when people started mixing up the trading app with a charity with the same name. 

🎮 Do these smaller investors believe in GameStop's business?

There’s been a flavour of that in the discussions. But lately it’s been more about inflicting pain on short-sellers, hedge funds and other big financial firms. Many talk about it in terms of evening the ledger with the financial elite, who benefited from years of gains as other people fell further behind.

Buying GameStop “isn’t about greed,” one user wrote on Reddit, after citing all the recessions “they” caused and the times “they” got bailed out with taxpayers’ dollars. “It’s about taking back what’s ours, what we’ve already paid for.”

“This is for making us work on Thanksgiving night all the way through black friday at 9.50 an hour,” another user wrote on Reddit.

😭 Options? Margin trading? 

If by now your eyes are watering, we're with you.

Options and margin trading are ways that investors can make a big profit with relatively small payments up front, if the stock moves in the right way. 

Many of the traders pushing up GameStop are smaller-pocketed or novice investors.

When they buy stocks “on margin,” they’re using borrowed money, which can supercharge their gains and losses. 

With options, an investor can buy the right to buy the stock at a later date at a certain price. If the stock hits that target, investors can reap a bigger return than if they simply bought a share. But if it doesn’t, it can mean a total loss.

📉 Where does Wall Street see GameStop stock ending up?

Much, much lower. 

Over the long term, a stock’s price tends to track with the company’s profits, and GameStop’s prospects for earnings remain cloudy. 

Many Wall Street analysts have price targets for GameStop at $15 or below.

🛑 Is it just GameStop swept up in this?

No. 

Other heavily shorted stocks have been seeing a surge of interest recently as investors look for the next GameStop. American Airlines, BlackBerry and other formerly downtrodden stocks have had extreme swings in price this week.

Tenev said trading was limited on Robinhood on "13 viral stocks."

👀 What about the broader market?

Critics used to dismiss investments in companies just over a belief that they will have a meteoric rise as a sideshow, saying the excess was confined to a few corners of the market. 

But Wednesday’s broader-market tumble gives some caution. 

Sharp losses for short-sellers may have pushed them to sell some of their other stock holdings to raise cash, and several investors say that contributed to Wednesday’s 2.6 percent slide for the S&P 500. 

It was the worst day for the market since October.

🔍 Did anyone see this coming?

Maybe not to this degree. 

But brokerages have been making it ever-easier for novices to get into the market and trade. 

Commissions have dropped to zero, and people can trade on their phones. 

As each barrier to trading has fallen, consumer advocates cheered the broadening playing field. But they also warned it’s possible to have too much of a good thing. 

Too-easy trading could encourage people to make too many trades that are too risky for them.

🔨 What about the SEC?

The struggling video game retailer’s stock has been making stupefying moves this month, wild enough to raise concerns from professional investors on Wall Street to the hallways of regulators. 

The US Securities and Exchange Commission has said it’s noticed all the volatility in the market and is taking a closer look. 

It is the SEC’s job to protect investors, and the expectation across Wall Street is that investors holding GameStop at these lofty prices are likely to be hurt when its price falls.

What sets this case apart is all the communication going on between investors on Reddit, as they goad each other to push GameStop higher, said Chester Spatt, a former chief economist at the SEC and a finance professor Carnegie Mellon University’s Tepper School of Business. 

But he said it’s difficult to declare it a clear case of market manipulation.

In the end, there may be no way to prevent people from pushing a stock too high and potentially burning themselves.

“A lot of people now feel like they’re empowered, and they don’t have to go through the traditional players” of Wall Street to invest, Spatt said. 

“And in fairness, they didn’t do that great going through the traditional players.”

😲 😡 What are the reactions?

Anger has spread beyond the investment community with rappers and US politicians on both sides of the aisle joining the backlash.

Senator Sherrod Brown, Democrat of Ohio, the incoming chairperson of the Senate Banking Committee, responded to the market mayhem.

"People on Wall Street only care about the rules when they’re the ones getting hurt," he wrote on Twitter. 

Democrat Representative Alexandria Ocasio-Cortez's tweet was shared by Republican Senator Ted Cruz who commented "fully agree." 

AOC has held Cruz responsible for the Capitol insurrection in which her life was under threat as well and did not take his RT too kindly.

Tesla founder Elon Musk, whose shares have also been a retail favorite, also commented on Ocasio-Cortez's tweet saying "Absolutely."

Celebrities also chimed in. "Yo this is a fucking CRIME what @RobinhoodApp is doing DO NOT SELL!!!", tweeted rapper Ja Rule.

"This was always a potential issue with Robinhood," said Ian Kar, co-founder and chief executive of research provider Fintech Today. "When are you responsible for helping your users make good financial decisions, versus allowing them to trade freely?"

"They support a capitalist free market only when it works for them. What we saw today was not a free market and it forced an awful lot of people to lose an awful lot of money," said 18-year-old Myron Sakkas of Coventry, a student at Warwick University.

"When ordinary people try to make money in a system where only rich traders can make money, that's what happens," he told the BBC.