Peaking at a value of $470 USD, GameStop stock has risen dramatically over the past few weeks in response to the internet movement organized by the subreddit, WallStreetBets. Home to the world’s two largest stock exchanges, the New York Stock Exchange and NASDAQ, Wall Street has been rattled to its core by a Reddit army and here’s why.
GameStop is an American video game retailer that declined in 2016 due to the video game market going digital, thus eliminating physical retailers. In April 2020, its stock valued at $3.25 a share, but it has been rising since September as amateur investors from WallStreetBets begin to take action.
These Reddit investors took to the commission-free investing app, Robinhood, where their mission is to “democratize finance for all.” However, Robinhood has not had the financial security for more investments in these heavily traded stocks and has had to suspend its users from trading in GameStop, AMC, Nokia, and Blackberry.
While the co-founders believed that limiting trades in these stocks would help them catch up on their deposits, the company has soared in popularity with thousands of individuals wanting to get in on the money-making.
Over on Wall Street, however, the Big Wigs are growing angrier as amateur investors who “don’t know what they’re doing” are short squeezing their stock. A short squeeze counters short selling.
Short selling involves an investor borrowing a stock, selling it at its purchased price, and buying the stock back later (to return to the lender) once the stock has dropped in price. Wall Street investors have been short-selling GameStop stock to generate a profit because the company has been declining over several years.
A short squeeze occurs when a stock’s price has a sudden increase, forcing short-selling investors into a scramble to buy the stock back at a higher price than what they initially paid to avoid buying the stock at an even higher price.
Short-selling is a risky business in the advent of a short squeeze. Wall Street investors are losing billions of dollars to a Reddit cult that gathered the masses to bet on a seemingly worthless company. But this wasn’t pure luck.
A Redditor on WallStreetBets monitoring the stock market noticed that a hedge fund had taken a massive amount of short trades against GameStop. The hedge fund has since declared bankruptcy and Redditors continue to hunt for hedge funds investing in short trades to short squeeze them into bankruptcy as well.
That is how it all got started, but no one knows how it will end.
While Wall Street investors are tortured over their losses, they don’t believe this Reddit-induced investment craze will last. American billionaire investor and hedge fund manager, Leon Cooperman says that “the reason the [stock] market is doing what it’s doing is, people are sitting at home, getting their checks from the government, basically trading for no commissions and no interest rates.”
However, introducing the new President of the United States, Joe Biden, also introduces his promise to raise taxes on America’s richest corporations, saying that wealthy Americans need to pay their “fair share.”
Needless to say, Wall Street and its wealthy American investors could face immense pressure if the US government and Reddit continue to act against their fortunes.
Some amateur investors are motivated by the adrenaline rush in taking down billionaire inventors and becoming a capitalist themselves; however, others are not so malicious.
After witnessing the effects of the 2008 financial crisis, younger generations are interested in capitalizing on short-term investments, hence their turn to free-investing apps like Robinhood.
In addition, most amateur investors in GameStop’s stock have said that public market investing is not a regular activity, but it felt good to be a part of a mass community that is bringing the economy into the hands of the people.
Despite one’s personal views, investors of any kind should be aware of the internet’s power and its ability to unite people. While we’ve seen the internet become a hub for political and social movements, it is now becoming a gathering point for economic reformers to plan and take action as well.
The US stock market is open Monday to Friday from 9:30 a.m. to 4:00 p.m., while Reddit is open all day every day. It’s not certain who will win big and who will take their pennies and run, but the Reddit army has certainly lit a fire under Wall Street.
