A Brief Introduction to few Capital Market Terminology

Before understanding what exactly has happened in this entire event and with the stock price of GameStop let us first understand the concept of Short Selling, Short Squeeze, Free float, Market- wide position limit.

Short Selling : - When the traders are speculating that the price of a share will go down in future, he can borrow the stock from his broker and sell them in the current market and later when the price will go down he will buy the same stock at lower price and will return the stock to his broker, in this way he will end up earning profits.

Short Squeeze : - When instead of going down the share price goes up due to sudden increase in demand then to limit the loss the shorter will try to buy the shares which in turn will add only to the upward pressure on the stock price and the share price jumps sharply.

Free float & Market wide position limit :- Let’s say a listed company is having 1000 crores worth of shares (market capitalization) out of which 500 crores worth of shares are being held by the promoters, the remaining 500 crores shares are known as free float, certain percentage(which is decided by regulators depending upon the market volatility) of the free float shares are known as Market wide position limit.

The Revenge of the American Middle Class

For those of you who don’t know GameStop is a popular consumer electronics and video game retailer based in the US. As a friend of someone who has bought video games from GameStop i can says it's one of the worst in terms of deals and all of the less popular alternatives which sold video games had better deals at any given time. But even if we are considering that buying at GameStop was never a good deal, hammering it's stocks to the point of making profit on it's lows and ups and drowning the private investors’ money is although legal but is morally wrong and that's why it sparked the ire of reddit users , most of whom have never invested in the stock markets before. They didn't do it for money either! They did it out of spite and that's what occurred in the recent days. The reddit users which mostly comprise of nerds, geeks and gamers had enough of the big shot Hedge funds owing millionaires and collectively decided to dry them out by buying GameStop’s shares with their own money which created a ripple effect and ended with Robinhood (the financial services company) blocking the buy of any more GameStop stocks. Based on what happened GameStop was the most apparent example of the hedge fund owners manipulating the American stock market. These reddit users basically had enough and they decided to also want a slice of the pie too and now we are here with GME (GameStop) rising over 2000% within 3 weeks. Melvin Capital which has shorted the GameStop stock heavily ended up losing 53% of its capital by the end of January . On January 26, it was reported that short sellers lost a total of $6 billion due to the squeeze.

My Analysis

By carefully analyzing the entire event it has already been clear that the motive of the online mob was not to earn profit but to take revenge from those Institutions which they believe were responsible for the 2008 Global Market Crisis as many Hedge Funds were heavily shorting the market when it was soaring at all-time high at that time. Whatever has been done in this case by both the parties is completely legal or in other word one can say A Hedge fund that used to rob the retailers since decades are being defeated in their own game by the retailers. Hedge funds, Institutional Investments are basically being managed by the people who are probably some of the smartest people on the planet, seeing these institutions on the verge of bankruptcy due to the collusive action of online mob is absolutely not normal. These large Institutions are being funded by various banks and if this activity are being done repeatedly by these online mob who doesn’t have any idea about how economy works and what will be the long term consequences of their course of action, and the Hedge Funds or Institutional investors starts getting bankrupt then it would not only affect the banking system but the entire economy will go down and we may witness a financial crisis even worse than that of 2008.

What this could mean for India?

This could happen in India as well, as our population is more than four times than that of US. Even though SEBI restricts the shorter by revising the Market Wide position limit from time to time which I feel is only effective till the retailers are not fully aware of the positions held by the Institutional investors. As more and more number of retailers would join the Indian market then probably we may see the Indian market getting dominated by the Retailers instead of Foreign Institutional Investors or the Domestic Institutional Investors.

Conclusion

It cannot be denied that the US market decides the course of direction of the market of other developing countries and it has already been witnessed during the Lehman Brothers Bankruptcy. The regulator should focus on this issue and should take such step so that this kind of activity would not be repeated again as this will not only affect the US market but it will have serious impact globally. A word of caution don't mistake it for ''capitalism vs. the small guys'', In my opinion it’s a false parallel created by people who have little sense of economics, they don't understand that there is a big difference between capitalists entrepreneurs, who creates competition sometimes by merely existing, as opposed to corporations which comprises of a collective collage of people and if history is any example they have done anything and everything to snuff out their competition by any means necessary instead of inventing or innovating out of necessity.

-By Achint Kumar Singh