From what I understand, I could be wrong but this is what I gathered. Forgive me if it's long winded.
-Hedge funds made a bet. They believed that Gamestop would go bankrupt. If Gamestop went bankrupt the stock would reach record low numbers and they saw this as an opportunity to make money. How?
-These hedge funds repeatedly shorted the stock. This means they borrowed shares from owners of the stock, sold them to other people for the current price, then bought the share back when the price dipped, gave the stock back to the people they borrowed it from (plus a fee) and they kept the profit they made on the sale.
-So say they borrowed the share when it was worth $10. They sold the share for $10. The next day the worth of that stock dipped down to $5, so they bought it back for $5. They made a $5 profit.
-They repeatedly did this over and over because in their eyes it was a guaranteed bet. By repeatedly shorting these shares they artificially drove the price down and they were making bank doing this, but they got greedy. They shorted more shares than they had borrowed (yes, that's actually possible but hard to explain).
-[this is where I might have it slightly wrong because I don't know how exactly you solve the problem when you short more shares than actually exist] Normally, shorting more shares than you have wouldn't be a problem because if the stock went down like they predicted they could just buy more of that stock at the discounted price and everyone wins. So at the end of the day you win right?
-Wrong, If they short a stock and the price happens to go up instead of down they now owe the amount that it went up. Why do they owe money? They are forced to pay that amount because they made a promise to give back the share that they borrowed. If that share now went up in price well tough luck you made the bet and took the risk hoping that it would go down and you were wrong so now you have to buy the stock back at the raised price.
-Thats where they fucked up, they didn't account for the autist factor. They borrowed a shit ton of shares, shorted them and promised to give back the share at a later date. This is when a bunch of autists recognized what they were doing so these autists bought a shit ton of the stock in between that window of time (before the hedge funds are forced to give the share back). So the price of the stock went way up, that's exactly what the hedge funds didn't want.
-Now all these autists own this stock, and they encouraged other retards to buy it as well. Why? Because getting other people to buy more of the stock will continue to drive the price of that stock way up. The price can go up an infinite amount. If enough people buy the stock and hold it past the hedge funds due date this can mean astronomical losses for the hedge funds when they inevitably are forced to buy back that stock and have to fulfill the promise they made to the people they borrowed the share from.
-These idiot hedge funds borrowed the share when it was worth $5, sold it for $5 and the stock went up and it's currently in the hands of the people. The people have the power to set the price that these hedge funds need to pay. If the stock reaches some sickening number like 10k once the due date comes, these hedge funds have to buy back every single stock they shorted by that amount on that due date. So if you bought a stock when it was worth $10 and the stock price reached $10,000 these hedge funds need to pay you $9,990 for every stock you own. They have no choice.
I wish I understood all of this. Makes my head spin.
From what I understand, I could be wrong but this is what I gathered. Forgive me if it's long winded.
-Hedge funds made a bet. They believed that Gamestop would go bankrupt. If Gamestop went bankrupt the stock would reach record low numbers and they saw this as an opportunity to make money. How?
-These hedge funds repeatedly shorted the stock. This means they borrowed shares from owners of the stock, sold them to other people for the current price, then bought the share back when the price dipped, gave the stock back to the people they borrowed it from (plus a fee) and they kept the profit they made on the sale.
-So say they borrowed the share when it was worth $10. They sold the share for $10. The next day the worth of that stock dipped down to $5, so they bought it back for $5. They made a $5 profit.
-They repeatedly did this over and over because in their eyes it was a guaranteed bet. By repeatedly shorting these shares they artificially drove the price down and they were making bank doing this, but they got greedy. They shorted more shares than they had borrowed (yes, that's actually possible but hard to explain).
-[this is where I might have it slightly wrong because I don't know how exactly you solve the problem when you short more shares than actually exist] Normally, shorting more shares than you have wouldn't be a problem because if the stock went down like they predicted they could just buy more of that stock at the discounted price and everyone wins. So at the end of the day you win right?
-Wrong, If they short a stock and the price happens to go up instead of down they now owe the amount that it went up. Why do they owe money? They are forced to pay that amount because they made a promise to give back the share that they borrowed. If that share now went up in price well tough luck you made the bet and took the risk hoping that it would go down and you were wrong so now you have to buy the stock back at the raised price.
-Thats where they fucked up, they didn't account for the autist factor. They borrowed a shit ton of shares, shorted them and promised to give back the share at a later date. This is when a bunch of autists recognized what they were doing so these autists bought a shit ton of the stock in between that window of time (before the hedge funds are forced to give the share back). So the price of the stock went way up, that's exactly what the hedge funds didn't want.
-Now all these autists own this stock, and they encouraged other retards to buy it as well. Why? Because getting other people to buy more of the stock will continue to drive the price of that stock way up. The price can go up an infinite amount. If enough people buy the stock and hold it past the hedge funds due date this can mean astronomical losses for the hedge funds when they inevitably are forced to buy back that stock and have to fulfill the promise they made to the people they borrowed the share from.
-These idiot hedge funds borrowed the share when it was worth $5, sold it for $5 and the stock went up and it's currently in the hands of the people. The people have the power to set the price that these hedge funds need to pay. If the stock reaches some sickening number like 10k once the due date comes, these hedge funds have to buy back every single stock they shorted by that amount on that due date. So if you bought a stock when it was worth $10 and the stock price reached $10,000 these hedge funds need to pay you $9,990 for every stock you own. They have no choice.