Reddit users declared war on Wall Street last week. The “David-and-Goliath” battle saw small investors use Wall Street’s own tactics against it by buying stocks in the failing company GameStop.
It pushed GameStop prices up by more than 1,700 percent.
The firm, a US video game retailer, saw its stock value plummet from £40 a share in 2013 to £3.65 in 2019. It was set to close 450 shops this year.
Hedge funds had placed bets on the expectation that GameStop’s share price would dive.
These funds take shares “on loan” for a given period of time. They sell immediately in the hope that they can buy them back cheaper at a later date and pocket the difference—short selling.
But small investors began to buy up shares, and GameStop’s stock value surged. Some hedge funds had to buy back their borrowed shares at high prices, which pushed prices higher.
Within two hours last Monday, GameStop’s stock prices rose by 145 percent—halting trading on the New York Stock Exchange nine times.
On Wednesday GameStop’s shares rose by another 135 percent and £17 billion worth of shares were exchanged.
Melvin Capital Management, a hedge fund, lost 30 percent of its £9.12 billion, and is now being bailed out by other companies.
Fat cats have lost out big time. But that doesn’t make the small investors the heroes.
The Reddit user who began the investment into GameStop placed an initial outlay of almost £40,000. Most ordinary people don’t have such funds to spare.
The episode only exposes how speculating and gambling on other people’s money can make others stinking rich. That trader now has stock worth £36 million.
Wall Street is furious that amateur investors have “rigged” the market. They know all about rigging the system.
Had Walmart diverted half the money it spent buying its own shares, one million of its lowest paid workers could have had a 50 percent pay rise. But Walmart was more interested in pushing its share prices up.
Calls have been made to suspend GameStop trading for a 30-day cooling off period. Big hedge funds have accused online investors of gambling, not investing. Yet they constantly gamble on falling stocks.
And they want revenge—by “regulating” the market to protect the “legitimate” institution of Wall Street.
For ordinary people, the stock market offers nothing. The top 1 percent of US households own 53 percent of US stock market wealth, with the top 10 percent owning 93 percent.
Working class people should fight against the world of investment that benefits the few. The destruction of the financial elite won’t come about by trying to win their game.
How do hedge funds work?
Hedge funds are largely unregulated pools of money from the biggest financial institutions and the extremely wealthy.
Their stated purpose is to minimise some of the risks in financial markets—to “hedge” the bets.
In reality, funds typically take enormous risks. Many invest heavily in complex financial instruments known as derivatives.
Futures contracts involve placing enormous bets on what the price of a commodity will be at a given time.
Futures are the simplest examples of derivatives—financial instruments whose value is “derived” from another, simpler instrument.
Rather than holding debts and collecting interest payments, companies merge them together and sell them as bonds. Others then gamble on the prices of these bonds. This is not a harmless activity—it is gambling on famine and poverty.
Stock markets—casinos to help bosses get richer
The bank system and the stock exchange can provide a means of financing investment for some bosses and a place to put the profits of others.
Capitalists constantly move their money around. Some save cash in a bank and hope to invest it at a later date.
The bank can then lend this money to a different capitalist who wants to invest now.
Companies issue shares to raise money. Shares promise their buyers a “dividend”—a payout from the future profits that will be made as a result of the investment.
But most share trading often has little to do with productive investment.
Huge capitalist casinos have developed, such as New York’s Wall Street or London’s City.
In these, the rich can speculate on the changing values of stocks and shares, currency prices, and a myriad of other investments.
So share selling, where people can buy shares in private companies, have raised a total of £479 billion in the US over the past 20 years.
Over that same period, the 500 largest companies in the US spent 30 times that, some £6 trillion, buying their own stock just to boost their own prices.
For instance, the drug company Merck insists that it must charge high prices for medicine in order to pay for new research.
In 2018, the company spent £7 billion on research and development—and £11 billion on share repurchases and dividends.
Companies can also bet on their own instability. The Volatility Index (Vix) is a measure of how volatile the US stock market is. Traders bet millions on the future position of the index.
Betting on a horse doesn’t make it run faster. These activities do not generate new wealth or expand production.
They represent the gambling of profits already created by workers—and ultimately they depend on the health of the real economy.