GameStop stock surge costs short-sellers an estimated loss of $70 billion, and Redditors push for lawsuit

Short-sellers lost $70 billion as GameStop's stock surged (Image Via Google)
Short-sellers lost $70 billion as GameStop's stock surged (Image Via Google)

GameStop vs. Wall Street

The unprecedented surge of GameStop's stock has led to short-sellers losing an estimate of $70 billion.

In essence, short-selling is the act of borrowing stock from a company, selling it on at a higher price before, and finally repurchasing it at a lower price of return.

The gamble here is that the stock will eventually drop in value while it is being loaned out. When investors repurchase it for a lower price, they keep the difference.

Here's a quick explanation of the situation:

The bets nearly paid off

A group of hedge funds started short selling GameStop's stock last year. But recently, the sub-Reddit r/WallStreetBets caught on to the game and left investors at a loss for words when they collectively purchased a significant share of the stock. Doing so shot up GameStop's stock, which was otherwise in decline.

Wall Street investors who were betting on GameStop's stock to tank lost an estimated $70 billion.

Redditors are waging an all-out war on Wall Steet by teaming up on this stock buy. Following this series of events, The White House stepped in and said that it would be "closely monitoring the GameStop-Reddit situation."

White House press secretary Jen Psaki said:

"Our team, our economic team, including Secretary [Janet] Yellen and others, are monitoring the situation. It’s a good reminder though that the stock market isn’t the only measure of the health of our economy. It doesn’t reflect how middle- and working-class families are doing."

Reverse Robinhood

After this fiasco unfolded, Redditors began organizing to potentially file a class-action lawsuit against trading platform Robinhood because the app restricted users from trading/buying certain stocks in response to the GameStop situation.

In a statement, the company explained its actions:

"We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK. We also raised margin requirements for certain securities."

However, the story is more complex. A user on Twitter explained:

At the moment, users can still close out existing positions on Robinhood but can no longer purchase any of GameStop's stocks due to the "recent volatility in the market."

The move stirred up the internet and some politicians, who are now demanding an official inquiry into Robinhood's actions.

Where do we go from here?

A lot of debate is expected to take place about this situation in the days to come. While trading of GameStop's stocks may have been stopped on Robinhood, other apps have left their doors open for investors.

But the fallout and backlash has just begun. A potential investigation could be launched shortly, given the mounting pressure from much of the internet and some prominent politicians.

That being said, enjoy this pinned tweet.

Edited by Srijan Sen
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