Social Media and the Stock Market Whirlwind

There's a good chance that your friends, co-workers and your little cousin who is in a frat are all talking about GameStop today, and you have been politely nodding along pretending you know what they're saying. Rest assured; you are not alone. 

The unprecedented rise in GameStop stick, along with the condition that led to this point and the potential fallout, has captured the full attention from the wealthy on Wall Street to the meme accounts on Twitter. Everyone is talking about it, and a growing sentiment on social media is "can someone please just explain it in a way that makes sense to those with zero background knowledge whatsoever?" 

I got you. 

Full disclosure, in no way, am I even remotely analyst or expert, these are 100% my opinions, and at best I am a simple person trying to give a simple answer for a very complicated topic. 

Granted, I do have experience and someone with an MBA in finance thought the analogies I posted in Twitter were up to snuff: 

If you are seeking 100% accurate comparisons and peer-reviewed education crafted by experts, this is absolutely not the place to be looking. However, if you are just tired of being out of the know and want someone to simplify it down and explain it to you like you are a five-year-old, you are in the right place.

My journey into trying to understand the complicated realm of the stock market began as a petty rivalry. After tuning out stock discussion of wins and losses between my grandpa, dad and brothers for years, I realized I was intimidated by sticks as it seemed like a "boys club," and so it became my mission to not only hold my own amongst the men in my family but to rally my girl-friends into the market as well. 

 

While I am on the smallest side of the scale encouraging my friends to consider entering the market, other individuals are banding together on an absolutely massive scale and to best explain the rise of the subreddit r/WallStreetBets is as simple terms possible, I will compare it to a generalization of varsity sports.

In the stereotypical high school sports hierarchy, the varsity team roster is set in stone before try outs even happen, with a handful of spots opened up from seniors who graduates. Likewise, the stock market is dominated by the 1%, with the average person occasionally getting the lucky. 

But, as we know in sports, you cannot get complacent. 

In this scenario, the returning varsity team is getting cocky. They are skipping morning conditioning, showing up to practice late and taking unnecessary risks during scrimmages. A couple of the incoming freshman realize this and join together to hold their own supplemental conditioning and practices ti improve their skills. Tryouts come around, and for the first time in a very long time, the perceived best players are no longer the best, and the incoming freshman beat them out for the spot on the roster and the underdogs are finally winning. 

In the real world, the members of r/WallStreetBets are like those freshmen who joined together to outmaneuver the cocky returning varsity team. The growing popularity of groups and forums like r/WallStreetBets, and the rising prevalence of online trading apps such as Robinhood that put managing your account into your own hands and completely bypass the need for stock advisors, and thus eliminating paying commissions and fees, has inspired a new wave of individuals who previously did not feels as if they had a place in the stock market to become investors.

With the background out of the way, this is an extremely rare anomaly, and part of the reason we got here in the first place is because things like this just aren't expected to ever happen and go against everything one would learn in "economics 101." Because of this, my simplified analogy many not fully cover every aspect, and may not be a direct representation of the full scope of what is going on. 

CAST LIST: 

- You are GameStop, in this analogy you are a shampoo company 

- Hedge funds are Jen the extreme couponer 

- The Subreddit r/WallStreetBets is Stephanie, a popular member of a large Facebook group. 

Your shampoo company (GameStop) has 1000 bottles of shampoo to sell, and each bottle costs $10. 

Jen (hedge funds) is a well-known extreme couponer in her area. In fact, she is so good at couponing that all of her neighbors give her money for their groceries on the 1st of the month and they trust her to find them the best deals and prices on items within two weeks. 

Jen knows that your shampoo company isn't very popular and that you will likely put each bottle on sale for $5 on the 7th of the month. 

Jen's neighbors paid er $10 for one bottle of shampoo in the 1st, but Jen does not buy the shampoo. She waits for the price to on sale and drop-down t0 $5, buys everyone their 1 bottle of shampoo, and then pockets the $5 profit she made from each person. This is a loose explanation of the concept of shorting. 

Jen then makes a post in a private extreme couponing Facebook group about how she shorts her neighbors and collects the profit and that it has been wildly successful for her, and that others should consider it. 

Stephanie (Subreddit r/WallStreetBets) is in the same group as Jen and sees the post. Stephanie loves the shampoo and isn't happy to see Jen playing such games. So, Stephanie alerts a different Facebook group she is in about what Jen is doing. 

The next month before the usual sale hits and the price drops from $10 to $5, everyone in Stephanie's Facebook group rush in and buys a large majority of the shampoo. Because there is a limited amount of shampoo in inventory, the sudden huge demand coupled with the low supply increases the cost per bottle. 

Now the shampoo is worth $20 per bottle. 

Unfortunately for Jen, she has already collected $10 from each of her neighbors in return for 1 bottle of shampoo. What this means, is that Jen still owes everyone 1 bottle, and must pay the difference out of her own pocket in order to deliver on her promise of 1 bottle of shampoo. 

At this point, Jen is at a loss, meaning that she is now paying more for the shampoo than she was given the buy with it, and the higher the price 1 bottle of shampoo goes, the more money she must pay out of her own pocket. 

Because the people in Stephanie's Facebook group know that Jen owes a lot of people shampoo, they will continue to buy any bottle they can get their hands on, as Jen as no choice but to fulfill her obligations an buy each and every bottle she owes.

The concept of Jen "shorting" the value of the shampoo bottle and then the price being raised because of such high demand is an extremely over simplified explanation of what a "short squeeze" is. 

To recap, in this analogy GameStop is the shampoo brand, Jen represents Hedge funds who are counting on the price of the shampoo to decrease in order to profit, the subreddit r/WallStreetBets is Stephanie, who alerts the public of Jen's shenanigans, and the price per bottle of shampoo increased because the general public felt as if the shampoo was worth more than Jen did, and so they took Jen's actions personally and purchased as much as they could to showcase the Jen was earning money by hoping the shampoo company would be losing money. 

So in the real world, how does this end? 

As I said above, I am in absolutely no way, shape or form, qualified to make any type of assessment on the stock market, and my best answer to "what is going to happen?" is that "your guess is as good as mine." 

What I do hope for, though, is that the sudden spotlight of the GameStop stock catches the attention of others like me who were previously too intimidated to begin learning about investing and that a new generation of investors take interest in education themselves. 

After all, if you have made it this far in reading this article, you have already taken the first step from being completely unaware to being curious, and now that you have a grasp on what the "path" is, i hope your curiosity leads you down it and you begin your own journey into learning about the world of the stock market. 

Guest Writer: Kelly A. 

Twitter personality, Integrated Strategic Communication major, and a firm believer that the internet is more fun when everyone is in on the joke.

Twitter:  @Keally22