This is an old article that I started writing years ago, but never finished. I thought I’d wrap up the article and publish it partly to get it out my drafts list, but also because it may provoke some thoughts and ideas, which is rarely a bad thing.Lewis Hurst
GameStop is massive in the news right now, and the average Joe is fighting back against big fund managers and their shorting. They’re calling it Wall Street vs. Main Street, but who’s the bad guy? I thought I’d share my alternative view of the situation.
What Is Happening?
Fund managers (and others) have taken a “short position” on GameStop (NYSE.GME), which makes money on the gamble that the stock value will go down. Put simply, a “short” is when you ask a broker if you can borrow stocks from them (usually at a fee), which you sell. At a later date, you then buy the stocks back and give them back to the broker. If the stock price went down after you sold, your buy-back price is lower, so you make the difference in money. If the stock went up in price since you sold, you will lose money when you finally buy back the stock to return the stock to the broker.
There is a lot of money to be made while shorting stocks, because you often borrow more than you can afford to buy, so your position is leveraged. The down-side is that you can also lose a lot of money if it goes wrong. The idea being that the difference between a buy and sell is coverable – which dictates how much you can leverage.
Shorting is not an unethical practice in itself, but there can be underhand stock market manipulation to ensure that the price goes down.
A band of Reddit users decided to start a campaign to get the general public to buy lots of GameStop shares to push the price up, so stock shorters lost money.
Who Is Losing?
These Reddit GameStop investors sit on a high horse as though they’re doing a good thing, beating “The Man”, but it’s more complicated than that. What they’re actually doing is stock market manipulation (morally questionable) and screwing over funds whose managers may or may not be unethically manipulating the market to support their shorting.
Unfortunately it’s not “The Man” who loses out here. Fund Managers get paid a lot when they win and less (still lots) when they lose. The real losers are those who invested in the funds that the Fund Managers look after. These can be anyone, which includes retirees, pension schemes of Joe Average (working and retired people) and anyone else who happens to have had their money in those funds.
Therefore, I’m not convinced that there’s anything ethically superior in what the Reddit investors are doing. In fact, I believe that what they are doing is the opposite.
Who Is Winning?
The thing about it is, GameStop are not a good company to invest in. They’re not performing well. Therefore owners of GameStop stock will on average lose money. With this type of manipulation going on, people who sell nearer peak prices will walk away with what is essentially other investors money. This isn’t ethical in my opinion, especially because those in the best position to do that are the people organising these Reddit threads because they’ll be the earlier investors in the manipulation. It’s basically a scam.
Probably the only winners (by group) would be the company (GameStop) itself. With an artificially high share price, it’s possible to do a capital raise (which from memory is what they ended up doing) to get lots of money for other endeavors, prolonging the lifespan of the company and the jobs of those involved and giving it a chance to do something different in the hopes of saving the entity.