Humans are very good at camouflage. They hide drug addiction behind 'health products' from the pharmaceutical industry and 'keep pubs open' campaigns. They sell serial liars as politicians. They pretend that the stock market is not a gambling den. If you read anything on social media about GameStop recently, you'll know that that is a lie.
The fib is that stocks are showing an adequate value of a company. There might be undervalued ones as well as overvalued ones, but in general the worth of the shares should reflect the companies' standing. Only, share prices can be manipulated and are on a daily basis. The manipulators so far were doing it in the dark or lying in plain sight. Now Robinhood has exposed the abyss of so called values. Did anyone ever believe that Facebook is worth more than one Dollar? It might be less now as the seams have split on technical issues, political interference, and general ineptitude.
The system of stock markets started out with a normal market of shares being sold and bought. The agreed price would give the current worth of a company. But banks and brokers were buying and selling stocks on their own accounts as well. Banks or brokers, financial experts in valuing companies, were soon giving out advice to investors by newspaper articles and investor letters. That the advice was 'sell' when they wanted to buy, and 'buy' when they wanted to sell was mere coincidence.
Getting greedy, someone invented 'options'. These options were trades for a future date and increased the casino effect on the stock market exponentially. Buying long means that the buyer expects the stock to rise, he can then buy at his options' lower price sell at a profit when that happens. Selling short meant someone sells shares he doesn't have expecting to get them cheaper before the option runs out. Hello gambling addicts, have you logged on to Robinhood yet? And being a gambling addict helps you get a job as a stock broker with any bank or fund. If you aren't, then you'll be one after six months on the job.
What happened with GameStop's shares is a casino story without equal. The company was valued at $2 billion in December 2020, on January 24, 2021, that was $24 billion. Does anyone want to dispute with me that this is a pure casino game scenario? This is, I have to admit, not a normal 'manipulation'. This is a perfect storm. Free trade platforms like Robinhood draw in the addicted gamblers and they can have a go at gambling on shares instead of horses or soccer. Then add an online interest group in Reddit dedicated to gambling in the stock market and you get a mass movement.
This mass movement works the lemmings way. One gambler follows another and suddenly GameStop shares show a tendency to rise in value. That in turn encourages less hardy gamblers to have a go as well; the curve up gets steeper. Now add two very large hedge funds to the mix who are 'short' with large amounts. They have to react and start buying at a loss. The price of the GameStop shares take off like a rocket.
On January 28, 2021, Robinhood and its ilk placed restrictions on gambling on certain shares like GameStop and others caught up in the gamble. The others are American Airlines, BlackBerry, and AMC Entertainment. All four companies are now grossly overvalued and will ruin a lot of people when they regain their proper valuation. Class actions against these restrictions are already moving to court. We will see how far courts are willing to protect gamblers.
The frenzy on these stocks has other repercussions as well. Whoever has any of them on 'short' options is now in trouble. That can be a severe loss to fund investors, liquidity problems, and outright bankruptcy scare. In the first instance, investors will start reclaiming their money if the loss was painful enough; the fund will probably go under. The other two scenarios mean that new funds must be found before they go under, too.
Further reading
Prophet of the Banking Crisis
How Money Came to Dominate Our Lives
How Economy Works
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