As I read up on the news I become partially and poorly informed by bad journalism about the stock market problems coming to fruition thanks to a plucky group of individuals trading equities.
To be more precise, I am talking about Gamestop and the war on hedge funds by the investors using Reddit to communicate.
In short (to make a pun), it is normal to see hedge funds become highly leveraged in the market in the hope of making money by small changes in share prices. They might have $1 of their own capital for every $10-100 in leverage (depending on market rules, national laws). The result for them is a small move in their favor generates profit, a small move against them generates a loss requiring them to pony up more money (by adding funds or selling other equity). A large move in their favor gives them a large profit and a large move against them can blow up the hedge fund and cause massive ripple effects in the rest of the market, potentially collapsing the entire bubble.
Those investors checked out the market and saw a stock they liked, Gamestop. They bought it and recommended it to each other as a buy and hold strategy. They saw the hedge fund that had a large short position in the company as well. (For those of you who aren’t sure what a short position is, it’s when you borrow shares of a stock and sell them in the stock market with a promise to return the stocks in a set amount of time, say 6 months. The person selling the stock short believes the price will go down or stay the same, that way they can make a profit it the price drops).
So the investors knew that a hedge fund would have to buy back the shares in the company at a certain future date (ensuring a buyer for their stock purchase) and they saw the price was pretty cheap and liked the stock. They were probably also pissed that large hedge funds and big investors manipulate the market in their favor using leverage, and thus wanted to do the same and get some revenge.
The end result is that the company stock price skyrocketed, essentially bankrupting the hedge fund (if the price holds), and will cause billions of dollars in wealth transfer from an institutional investment company back to small time investors. This will cause ripple effects as the hedge fund unwinds, possibly causing other companies to blow up, or the need for FED intervention and a bailout. Another possibility is that the government will simply rule it illegal, screw the small time investors (another victory for cronyism) and undo those transactions.
During this time, major companies that allow small time traders on their platforms are now manipulating the ability to buy and sell stocks. How’s that for a rigged market?
It is obvious that the big institutions along with the government are going to work on preventing their wealth and power decreasing.
Millions of investors also have money in 401k retirement plans. If the American people are willing to suffer some pain in favor of creating a giant middle finger to the elites they can simply do the following:
Set their 401k allocations to cash.
That’s it. Cause the 401k companies to sell the assets and convert to cash. It will drive the market into a selling panic, driving the price down (unless the FED simply buys it all, which would show 100% how rigged our nation became). This would cause havoc in the markets, cause massive valuation changes, trigger automated buy and sell algorithms to go crazy.
In short, it would make the 1929 market crash look like a joke, I’d bet the market would halt sales in the first day of action. Every 401k converted to cash would eliminate more ability for market manipulation .
As a caveat, I have to say I am not giving investment advice, I am not a stock trader or broker. What you do is your own responsibility and you bear all responsibility for your individual actions.