There’s a lot going on in the stock market this week and both and Reddit in general are inundated with questions about it. This is an opportunity to ask for explanations for concepts related to the stock market. All other questions related to the stock market will be removed and users directed here.
How does buying and selling stocks work?
What is short selling?
What is a short squeeze?
What is stock manipulation?
[What is a hedge fund?](https://www.reddit.com/r/explainlikeimfive/comments/l6ptb7/eli5_what_is_a_hedgefund/)
What other questions about the stock market do you have?
In this thread, top-level comments (direct replies to this topic) are allowed to be questions related to these topics as well as explanations. Remember to follow all other rules, and discussions unrelated to these topics will be removed.
**Please refrain as much as possible from speculating on recent and current events.** By all means, talk about what has happened, but this is not the place to talk about what will happen next, speculate about whether stocks will rise or fall, whether someone broke any particular law, and what the legal ramifications will be. Explanations should be restricted to an objective look at the mechanics behind the stock market.
EDIT: It should go without saying (but we’ll say it anyway) that any trading you do in stocks is at your own risk. **is not the appropriate place to ask for or provide advice on stock buy, selling, or trading.**
In: Economics
Right, let’s see if I can explain this. Obligatory am not a stock broker, so please take what I say with a grain of salt, and I definitely welcome any corrections for things I get wrong.
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##Stocks and Shares
Let’s say you have a company called CORP, and that company has a board of directors. Now CORP wants to become publicly traded, so they announce that they will sell one seat on the board for $20. Alice hears of this and thinks that’s a pretty good deal, so pays them the money and now gets a small say in what the company does and in return CORP gets a little bit of extra money. This seat is a **share** in the company, which can be traded in something called the **stock market** (where people can buy and sell their stock in a company).
Now as the years go on, CORP becomes a global company and now everyone wants to be at the table. Suddenly Alice’s seat becomes really valuable. If Alice wants she can sell her seat for $100 now, or keep her seat and hope that CORP does better and sell it for more later on. Even though right now Alice doesn’t have any more money in her wallet than she did originally, she is still worth more money because the seat she owns is now worth more.
Importantly, when Alice does sell her seat, even if she sells it for $1000, CORP doesn’t actually get any of that money – they already sold the seat to Alice a long time ago for $20. However, later on CORP might apply for a loan, and the broker might look at the price of the seats at their table (their **share price**). If the price is really high, that must mean the company is doing well for themselves so the loan is more likely to be approved. Also, if anyone ever owns more than half of the seats at the table, then that person also effectively owns CORP. So CORP really wants the price of their seats to stay high.
##Short Selling
So what if CORP starts doing poorly? Well Bob ‘Shorty’ McScrooge might see this and see an opportunity to make money off of CORP’s losses. So what he does is he goes to Alice and asks her if he can borrow her seat. She reluctantly says yes, as long has he promises to give it back in a month. He takes this seat and sells it to Joe for $100. As the days pass, the price of a seat at CORP goes down. When the end of the month comes around, Shorty buys another seat back, but now that the price has gone down he only has to pay $20 (meaning he effectively made $80 since he originally sold the seat for $100).
Let’s say now that after Shorty borrowed Alice’s seat and sold it, CORP finds gold and now everyone wants to buy a seat again. Well now Shorty is in real trouble. At the end of the month, he still owes Alice her seat back, but now seats cost $1000 to buy. If Shorty can’t find a way to make the seats cheap again, then he might go bankrupt.
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## GameStop
This is pretty much what happened with GameStop (aka GME). They were doing really poorly and their share price was going down, so lots of billionaires borrowed stock (seats) and sold them, expecting the price to drop resulting in them making even more money at the cost of GME. Reddit realised this so bought all the stocks causing the price to soar, meaning the billionaires are going to have to spend lots of money to buy back their borrowed seats (costing them billions of dollars). Of course, losing billions of dollars is something billionaires would very much like to avoid.
## Robinhood App
Robinhood is an app used by a lot of everyday people to trade stocks, and was the tool used by a lot of redditors to make GME’s share price get so high. No matter what the billionaires did, more and more redditors started using Robinhood to buy more GME stock, causing the prices to get even higher (meaning the billionaires would have to pay *even more* to return their borrowed seats). So to try to drive the price down, Robinhood said it would no longer let people buy GME stock, and that they could only sell now (remember, the seats at the table are only worth something if people are able to buy them). This is illegal and has been widely criticised by US representatives from both parties as well as basically everyone who isn’t a billionaire.
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EDIT: Added Robinhood section
EDIT 2: Formatting and typos
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