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3 Ways to Explain Reddit Stocks to Your Kids
A lot is happening in the subreddit r/wallstreetbets right now. To raise the stock price of GameStop, its users bought shares, pushing the stock price up to more than $480 per share on Thursday.
This move is costing institutional investors (hedge funds) millions of dollars after betting on shares on the company dropping. Known as a short, some hedge funds bet against the stock, waiting for it to drop in price for their investment to be successful. Right now, the stock price is very high, so trading has halted. And to cut their losses, hedge funds would have to sell out — which increases the stock price even further. Interesting, isn’t it?
But let’s be honest. Stocks and trading are not easy subjects to grasp. If your children stumble upon a GameStop news headline, how would you break it down to them? And how do we teach them more about the unpredictable stock markets of 2021?
Here’s a little help:
1. Define key terms like stocks and shares
Explain what a stock is and what it means to buy one. Here’s a quick definition if you’d like to use this article as a guide: A stock refers to a share of ownership in a particular company. The right of this stock makes you an owner of a small fraction of that company. But, even a small fraction – or share can have value if the company is big enough.
Share can be traded on an open market, which means buyers and sellers can make offers. Once they agree on a price, it becomes common knowledge that a certain share is worth the value agreed upon. But there’s a catch.
Buyers and sellers can quote whatever prices they want, and this can often cause chaos since thousands of trades are happening electronically at once. Here’s where you can switch the conversation to explain what caused a Reddit community to “buy up” GameStop stocks.
2. Explain it like a movie synopsis
Depending on your take on the stock fiasco, keep it factual and feel free to point out the main players. In this case, focus on GameStop, the Reddit channel r/wallstreetbets, its rookie day traders, and hedge funds. It’s important to start with a quick timeline as well, so they can better understand cause and effect.
Take a look at the timeline before venturing into the plot:
- Dec. 8, 2020: The companies shares take a dip after missing Wall Street estimates for quarterly revenue. Factors for revenue loss include pandemic-led store closures and competition from digital-game sellers.
- Jan. 11: GameStop appoints Chewy.com co-founder Ryah Cohen and two other e-commerce veterans to its board.
- Jan 13-14: Shares rise 57%, followed by a 27% jump in the same week. This puts shares at a target price of only $12.50
- Jan 19: Short seller Citro Research tweets that buyers at these levels will be losers in the game.
- Jan 22-25: Shares rise 50% and soar 144% on Monday.
Now let’s go over some key plot points.
GameStop is beloved by some investors. Others want to see the stock fall.
Small investors saw Cohen’s move to GameStop as a start to the retailer’s digital transformation. But, many hedge funds and other long term Wall Street investors don’t like GameStop stock at all, which is why they kept betting on the company stocks to fall by “shorting it.”
Quick recap on what’s a short: It’s how investors make money off a stock falling. They borrow a share and then sell it. Later, if the stock price hits an expected value, they buy the stock at a lower price and keep the difference.
The combination of nostalgia for a struggling company and frustration over hedge funds shorting the stock might be key factors behind Redditors’ decision to back GameStop.
The stock frenzy becomes a debate about the financial elite
Although GameStop’s share prices were high this week, the company is still struggling, and analysts expect it to keep losing money in its next fiscal year. Based on wallstreetbets user discussions, buying GameStop stock is about teaching short sellers, hedge funds and big financial firms a lesson. Some even describe it as balancing the influence with the financial elites.
Rookie day traders plan to look for their next GameStop
As GameStop’s stock prices begin to track down again like its profits, investors seem to be looking for other subdued stocks. Some stocks seeing extreme highs this week include American Airlines, Blackberry and AMC.
Offers tools they can use to practice
Now, I know that your child might not be the next Warren Buffet or have the slightest interest in finance and economics. But, if, by any chance, they do have more questions after going over the GameStop story, it’s time to consider tools that could spark more curiosity.
Online investing resources for kids
Use this list to introduce your children to investment platforms and educational kits.
- Greenlight Max — A fintech that teaches kids financial literacy, launched its first educational investing platform. This app allows children to research stocks while offering safety features like purchase and identity theft protection for extra peace of mind.
- Our Teen’s Guide to Investing in Stocks and ETFs — Use this easy guide once you’re ready to sit down with your children and take the first steps into a stock.
- Warren Buffet’s annual letters to shareholders — These date back to 1977 and are a great starting point filled with jokes and interesting anecdotes. You can read them for free on the Berkshire Hathaway website.
- TeenVC — Find free learning content on this website, as well as more educational programs designed to help children understand investment as a step towards business ownership.
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