It’s a question we’ve asked – and answered for years: What’s up with the stock market? But last week, when GameStop went from the back of America’s minds to the top of their lips, the question gained new significance. Even finance pros and Wall Street veterans were asking, “Okay, really, what’s up with the stock market?!” Here’s how famed investor Jim Cramer explained the insanity:
To explain what happened on Wall Street last week is incredibly complex. But here goes. Most of us invest in stocks the old-fashioned way: by picking companies we admire and think will do well in the future. If we’re right, their stock goes up and we stand to profit. If we’re wrong, we could lose our investment. But in the complex portfolios of professional investors is something called a “short position.” It’s essentially investing upside-down. Investors “short” a stock they think will do poorly. If they’re right, they profit. But if they’re wrong, they could lose – big time – for betting againstthe company.
At best, “shorting” a stock is an insult, and at worst, it can damage a company’s financial prospects. Translation: companies and the people who love them don’t like it. Some, like Elon Musk, even think the practice should be illegal.
But at least for now, the practice is not illegal. And yet a massive group of armchair investors figured out how to punish those who were “shorting” their beloved companies anyway.
Gathering on the Reddit message boards, investors went from one stock to the next – most notably GameStop – investing in shares without regard for their future prospects, but instead, just to inflate the stock price and cause the big investors who bet against them to lose.
GameStop’s stock price rose by thousands of percent. The hedge funds who bet against it were forced to sell other stocks just to cover their catastrophic losses. And all of us were left wondering what all of this meant for the future of investing.
As for the immediate impact, some unsuspecting investors had a pretty good day.
A ten-year-old from Utah who just so happened to receive a gift of $60 worth of GameStop stock for Kwanzaa in December of 2019 suddenly found himself sitting on a $3,200 goldmine. He sold his stock while the price was while sky-high, and immediately put $2,200 into savings.
It’s unlikely that the GameStop debacle will become a template for future profits, but who knows. In the meantime, anyone lucky enough to profit from the insanity would do well to keep the funds growing.
Want to know what to do with your GameStop fortune? Check out our full episode, “What to do with a Windfall.”