Robinhood
and other brokers on Thursday restricted transactions on shares at the center
of major volatility on stock markets spurred by people organizing on platforms
such as Reddit. The restrictions sparked outcry among the individual traders —
known as retail investors, and among US lawmakers on Thursday. They said that
established professional funds were largely able to continue trading the
affected stocks.
These
companies of what social media users have been calling a "Reddit
rally" where an army of retail investors, supporting each other on Reddit
threads such as r/wallstreetbets which has some 5.4 million subscribers, bought
stocks in heavily shorted companies. The collective action forced up stock
prices while simultaneously ruining the short positions held by the hedge
funds, causing them huge losses. Stock for aging bricks-and-mortar US computer
game store Gamestop traded between $112 and $480 dollars a share in the past 24
hours, in massive swings, from just $18 (around €15) a few weeks ago. The
unexpected rises in prices cost established hedge funds millions. Gamestop's
stock had been falling for six straight years and both funds had bet heavily
that the firm's stock would continue to fall. They do so in a process called
short selling: borrowing a share from someone else, selling it, and agreeing to
buy one back and pay back their debt at a later date. They profit if the price
sinks as expected, but still must repay the shares if prices rise. The rising
prices forced Melvin to close its short-selling positions in GameStop shares on
Thursday and cut its losses.
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