Podcast Notes: 34 – HEDGE FUND AND GAMESTOP – WHAT HAPPENED ACTUALLY!

Listen to this podcast here: Here

Guest: Sandesh Dholakia – Sharing bit sized info every day on current affairs from an economic and financial angle.

  • US stock market

-Stock markets whether it’s from India or any other country’s stock market, the way of working is the same, they all work on the same principle i.e demand and supply.

-When the demand is more, the prices will be high and when the demand is low, the price will be low.

-The trends of the global market are also the same. For eg. If the markets of the US are high, there are sure chances that the markets of India are high too.

-Globalisation is increased to an extent that the flow of money is similar in each country.

  • What are hedge funds?

-The word “hedge” comes from hedging, hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset.

-But nowadays, hedge funds have become different from hedging. 

-Hedge funds are profit making institutes where there are two types of people, one are investors and the other one is fund managers.

-What they both do is they make a pool of money, and they invest it on different things like shares, derivatives and other asset classes. And from that they try to get return.

-Hedge fund is a profit making body in which activities which involve high risks are done which normally is different from normal trading.

-To start a hedge fund in India on your own, your capital should exceed 20 Crores, because SEBI (Securities exchange board of India) surmises that starting a hedge fund is very risky, so to start a hedge fund you should have enough money, even if you lose you’re not bankrupt.

  • Difference between hedge funds and mutual funds.

-The goal of hedge funds and mutual funds is the same, i.e to generate profit. 

-But small investors are more likely to invest in mutual funds, money is pooled and invested in some other place.

-People who are rich put their money in hedge funds.

  • What happened with Gamestock?

-Gamestock was a company which used to operate only in physical stores, and used to sell video games offline.

-But due to Covid scare their sales went into a decline, nobody was buying video games from their store.

-Now, there are two kinds of players in the market, one is retail players (Don’t own much money) and the other is institutional players (With good amount of money).

-What institutional players realised was that the company’s value is not what it used to be before Covid scare, so they (institutional players) took a position called short selling.

-Short selling is selling in expensive and buying when it’s cheap, the profit in between is called short selling.

-So institutional players, they wanted shares of gamestock to get cheap so that they’ll be profited from it.

-But in January, gamestock released its results. 

-Gamestock changed its business, they saw that due to Covid scare if they kept operating offline, they wouldn’t be able to sustain in the market, so they started doing business online.

-The moment they started operating offline, their revenue increased by 300% which is a very big amount.

-The retail players became very bullish on them, so they started increasing the price of the stock market.

-Lots of retail players had a discussion on reddit about it.

-Retail players became bullish and the institutional players became bullish who wanted the other.

  • What discussion did they have?

-On January 11, the results of gamestock came: the retail players saw that the institutional players are bearish in this, but the retail players thought that the price of gamestock’s stock will increase due to their performance.

-The people on reddit started discussions on how the price will increase, (Wall Street beds: A group which had 2 Million+ people in it at some point) they all became bullish on it and started putting their money on Gamestock because they believed that due to their performance (300% spike), they’ll be more profitable in the coming time.

-That’s why their price increased suddenly.

  • Why hedge fund vs. Gamestock?

-Institutional Investors of hedge funds wanted the stock price to drop, because that’s the only way that they’ll be in a benefit.

-But suddenly so many people started buying the stocks of Gamestock, the price in Increase, due to which losses started occurring in Hedge funds.

-It’s not illegal because (It’s neither white, nor black; It’s grey) so many individuals are doing it, but if it’s planned between two people who are extremely rich, then it can be illegal, it’s called collusion.

-In the US, Robinhood is a famous broker who has banned trading stocks of Gamestock. It’s because the other investors were getting a loss from it. 

  • What’s the future?

-It’ll be banned for a while.

-The news has spread so much that everyone wants to invest in stock of Gamestock.

-If the prices of Gamestock’s stock increased further, the institutional investors will be at a huge loss.

  • More important points

-In India, it won’t happen due to circuit limits.

-In India, Stock prices of any stock won’t go more/less that 20%, if it does, trading of it will be stopped for a day.

-But in the US, there’s no circuit limit.

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