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Investing, the stock market and Robinhood explained - a short guide

Gamestop stock market scandal explained.

Let us start by explaining, very briefly, what investing is. Investing is a broad term, that basically means to allocate your resources (money in general), in endeavors, assets, real estate, stocks and other, with the expectation to earn a profit on your investment. Being an „Investor” might seem intimidating – but the truth is that anyone can be an investor. This could mean investing the extra money you have in a rental property, in a novel business idea or in some stocks and voila, you become an investor. With investing the „high risk, high gains” rule applies – as it does in general in business. If the risk is low, the profits or gains will be moderate to low, if the risk is bigger, also the possible return on investment will be higher. Similarly, when placing a bet on a football game, if you put your money on the less popular team, the one the majority is betting against and they end up winning the game, your profit will be much, much bigger than if you had placed the bet on the more popular team and they had won, but please note we do not encourage betting in any way or form.

Investing in a property or business requires more capital, apart from that, it is also a bit more complicated and it often requires contracts or other binding documents. Investing in stocks, however, is a much more accessible form of investing, and although it is not necessarily simple, it is definitely easier to wrap your head around it.

So, what are stocks? Simply put – stocks are fractions of ownership of a corporation. A company needs to be publicly listed on the stock market before investors can go out and buy its stocks through an online brokerage account. Before buying any stocks, we of course recommend getting educated on the subject, but you do not need a formal education for this. To get started it can be as simple as watching relevant Youtube videos or reading up on Investopedia and remember to start small and stay away from high risk transactions in the beginning, at least until you acquire some experience with trading stocks. This way you can minimize your risks and learn along the way. To buy stocks you will of course need a certain amount of money and an account on an online trading platform. The applications for these trading platforms are not extremely complicated or lengthy, however, a survey to test your knowledge is usually included. This initial survey is meant to help and guide the costumer.

In recent years, investing in stocks has become even simpler with the release of trading apps, such as Robinhood. Robinhood offers commission-free trading, extended protection, high security standards and dedicated customer support.

So, where’s the catch? How do they make money and what’s in it for them? It seems that the guys behind Robinhood genuinely want to provide people better access to the financial markets, but of course, they need to make profit as well, and the profit comes Gold memberships, stock loans, rebates from market makers and other. They pride themselves on being very transparent about their business model, therefore, all this information is readily available on their website.

By this time, you have most likely heard about the GameStop stock market scandal that happened earlier this year, in which Robinhood was also involved. What happened was that a group of Reddit users (Reddit is a social news and discussion website) agreed to start buying GameStop stocks – to drive the stock price up. Why did they do this? They discovered that the majority of GameStop stocks were short stocks. Short stocks or shorting basically means borrowing stocks for a certain period of time (with the assumption that the stock price will decrease) and them selling them further, therefore, when it is time to give back the borrowed stocks, their value is much lower, and you have therefore made a profit. This is a very simplistic explanation. The truth is that shorting stocks is a very risky business and therefore it should only be undertaken by experienced traders or investors (often hedge funds), who have the necessary tools to analyze a stock and its value over time.

When the group of Redditors started buying stocks, its value began to rise, and all those experienced traders that were shorting Gamestop, started losing money. To give some background – a GameStop stock was worth a few dollars in 2020, in January 2021 its value had risen to over $500. Everything was going very well for the Redditors and GameStop, then the news reached media, even the White House. Things begin to worsen when several social media platforms banned communication between Redditors and Robinhood banned buying GameStop stocks on their app, enabling only the option to sell the stocks. Robinhood was the preferred trading app of many of these amateur traders, and so gradually the stock price started going down again. The actions of Robinhood enraged the general public, who were well aware of what all these platforms were doing. Robinhood is currently facing several lawsuits for restricting trading on certain stocks. Blocking buys and only allowing sales is perceived as a form of market manipulation, it therefore seemed like Robinhood was siding with hedge funds. Why did it do that? Well, it seems that Robinhood had been selling the data of its users to these hedge funds, making the hedge funds its customers. Obviously, this story keeps getting more and more complicated, and we will have to wait and see how everything turns out.

The GameStop rebellion has started a sort of movement, it is the first massive intersection between social media and the financial system and without a doubt, this story has earned its place in economics books and it will be thought in various business and economics schools around the world.

Written by:
Emil Kjær

Emil Kjær

Emil uses his expertise to make a difference in the financial sector. He studied at the University of Southern Denmark and has been General Manager at Intelligent Banker since 2013, where he has helped more than 500,000 users from all over the world with their financial needs.

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