Nostalgic companies are seeing a stock boost this week. Companies that haven't been doing well, such as GameStop, Blackberry, and AMC. The boost is coming partly from buyers on Reddit. They're deciding to purchase shares of these failing companies to ultimately hurt wealthy hedge funds. But to explain why, we have to start with hedge funds. They have been shorting these companies for years. Expert Lisa Bragança explains what shorting is.
What You Need To Know
- Buyers on Reddit are deciding to purchase shares of these failing companies to ultimately hurt wealthy hedge funds
- It's not yet clear if this is legal, or market manipulation
- Robinhood has already limited GameStop, Blackberry, AMC, and others, GameStop for example is limited to just one stock for new buyers
"So shorting it means that you think that the price today is higher than the price its going to be in the future," said Former SEC Branch Chief Lisa Bragança. "You're selling something you borrowed, and now you have to go find another share, in the future, to give back."
Hedge funds are essentially betting these companies will continue tanking. But when tons of shares are bought from the little guys, the buyers on Reddit, the price goes up. Which means trouble, for the big and powerful, because those companies aren't tanking anymore.
"Now we have Melvin Capital that has taken billions in losses and collectively these funds have taken billions in losses. Because they've had to go out and find these shares, and pay a whole lot more for them," said Bragança.
In theory, the next thing for these Reddit buyers to do, is sell while the payout is high, around $300 per share. But they aren't selling, they're holding, so the hedge funds can't get ahold of shares.
"This has been sort of a democracy like Occupy Wall Street sort of moment as the little guys have taken the big guys to task," said Bragança.
But is this legal?
"It's new, and its not clear whether it makes sense for regulators to go after these individuals," said Bragança.
Is this market manipulation?
"Do I think that the SEC is going to bring charges against these people, probably not a lot of them," said Bragança. "There will be studies that the SEC does, there will be congressional hearings, there will be investigations, I think its going to take a long time, and in the meantime I think there probably will be broker dealers like Robinhood, Interactive Brokers, and others, that put limits on the amount of these kinds of trades."
A move Bragança says is to protect themselves. Robinhood has already limited GameStop, Blackberry, AMC, and others. GameStop for example is limited to just one stock for new buyers.