GameStop’s stock price skyrocketed after users from a Reddit thread agreed to purchase shares from the failing company on Jan. 27. This resulted in billions of dollars of losses for major investors.
GameStop’s stock, GME, had been doing terribly in recent years since the majority of consumers have transitioned to digital gaming and downloads. The demand for physical games has declined to the point that the video game retailer had to close 783 of its locations in the past two years.
Hedge funds realized death was knocking on GameStop’s door and took advantage of it.
Simply explained, when a manager of a multi-million dollar hedge fund thinks a company is going to go bankrupt, they can borrow shares in that company from another investor, sell them, then make back some money when the stock price drops to zero – all of which is entirely legal. This process is called shorting a stock.
Some hedge funds did this so many times to GME that they borrowed more shares than what actually exists.
Redditors realized that all they had to do was make sure the stock price doesn’t hit zero by buying shares in GME and holding onto it. Thus, a bunch of regular people came together on a Reddit group called Wall Street Bets, which is made up of about 4.5 million users, and bought GME shares.
This drove up the price of GME over 1000% in two weeks, from $40 to almost $475 per share as of 7:30 AM on Jan. 28, forcing those hedge funds to cover their bets that they made against the company’s success.
“When a bet goes wrong, short sellers rush to repurchase the shares they borrowed so they can return them and exit their trades,” Matt Phillips and Taylor Lorenz wrote for The New York Times. This war to reclaim GME profits actually forced the stock price to go up even further.
Wall Street investors hoped that by putting more money into GME, the so-called Reddit meme-investors would back off and sell the shares they own, but this hasn’t been the case.
The Wall Street Bets thread became so successful that hedge funds lost billions of dollars of wealth to ordinary people — video game lovers, Reddit browsers and newcomers to stock-investing on Robinhood.
“Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino,” Rep. Alexandria Ocasio-Cortez tweeted.
“It’s shocking, really amazing, and gratifying to see a little bit of the pain going on the side of the hedge funds,” Jordan Belfort, a former stockbroker depicted in the film The Wolf of Wall Street, said. “The hedge funds have been beating up little investors since the beginning of time pretty much.”
Now, these hedge funds are forced to buy back their short sales at insanely high rates. Financial services like Robinhood and TD Ameritrade, however, intervened.
“In order to protect the firm and protect our customers, we had to limit buying in these stocks,” Robinhood CEO Vlad Tenev told CNBC.
This creates a divide between the working class and hedge funds because Robinhood’s free services and TD Ameritrade’s fee-free offers mostly attract and are used by the working class.
In addition to what some are now viewing as a classist war, the Biden Administration stated vaguely that they are “monitoring the situation.”
While GME restrictions and activity monitoring will surely cause the price to plummet again, no one knows when or how this stock war will end.
Unfazed by monitoring, redditors have also bought stocks in AMC and silver, seeking to replicate their success. They also plan to do the same with the technology company Blackberry.
The stock market is a game and as GameStop’s slogan puts it: “Power to the players.”
