The Robinhood problem and why it could happen to you and the Gamestop Rally

Brokers are basically big collections of different currencies. They have something called liquidity. This basically means someone is providing them with the funds they need to manage our trades. The Robinhood problem? They didn’t have enough to cover the trades of people buying Gamestop / GME on their platform. So they started closing trades and halting trading. Technically and legally they cannot do that because they have a contract with you to provide you with the service.

Could it happen to you? Of course, in any Black Swan Event you can have a situation where a provider simply runs out of liquidity to provide the trades.

Leverage is a huge problem

When you start out trading stocks, forex, crypto etc you have this strange idea that you are going to be able to buy a stock for $1 and in 10 minutes sell it for $5000.  That’s an exaggeration of course, but this can actually happen, but it’s rare. When it does over-leveraged brokers will be in trouble.

Leverage is basically when you buy $1000 worth of stock but the broker allows you to borrow say 10 times that to place the trade, so effectively if the stock rallies your $1000 can make way more money, however, if it loses bad, you could lose your total investment (i.e. if the price of the stock falls so low that your $1000 is gone). If you don’t use leverage, the only way you can lose completely (have your stock closed) is if the price falls to 0. Effectively the device has gone out of business.

Leveraging your positions is a terrible trap. I recommend you don’t do it. The Robinhood problem was simple. They had to stop trading and protect themselves from going bankrupt.

More about GME Gamestop

I’m still feeling quite smug I started a thread that broke Reddit. That I’m in a stock that is up over 113% on my account. But I’m very nervous and I will be putting my stops up behind price to protect the profits.

I hope whatever has pushed $GME Gamestop up will continue and hold the stock higher. But literally, none of my usual sources has any idea.

I have a weird theory and you can quote me on this.

I think someone big has bought stock, a lot of it. Could it be that Elon Musk has taken an interest?