How GameStop, Reddit, and the Internet shook up Wall Street
In the last week of January, Wall Street was turned upside down as hundreds of thousands of people began buying stock into various retail companies. Over multiple days, the stock market became so volatile that many stock purchasing platforms, such as Robinhood, stopped trade for several hours. Hedge funds that had billions of dollars on the line were suddenly lost in a matter of days, according to CNN Business. So how did this all happen?
Wall Street has become the pinnacle of what modern free enterprise looks like in the world today. However, because of the COVID-19 pandemic that is still ravaging the country, many companies’ stocks have been falling dramatically over the course of several months — specifically retail companies. On Jan. 26, a post on the social platform Reddit sent the internet into a frenzy, causing thousands of people to invest in companies to gain quick cash. This post came from a group called WallStreetBets. The post called upon people to short squeeze retail companies like GameStop, AMC, Nokia, and BlackBerry in order to gain a quick amount of money since the price of the stocks for these companies were as low as $5. Social Media sites like Twitter and Facebook soon learned about the post, and thousands more began to invest what little they had in order to get rich quickly.
Understanding the Stock Market
Companies such as GameStop, AMC, and other retail companies saw a massive spike in their stocks as a result of short selling and short squeezing. These terms are at the heart of this issue. Senior Trey Farley is one of the co-presidents of the investment club here at Olivet, and is a business major. He provided some context and insight into what unfolded in January.
According to Farley, the two vital pieces to understand are short selling and short squeezing.
“For simplicity’s sake, short selling is when an investor borrows a stock, sells it, and then buys it back and returns the share to the lender” said Farley. “The profit comes from a stock falling in market price. If the price rises, the investor can lose a significant amount in money.”
A short squeeze, according to Farley, is “When individual investors buy a large number of shares to drive up the price so that people shorting the stock lose money and those individual investors can realize quick gains.”
Chaos on Wall Street
On Jan. 26, GameStop’s stock cost about $76 when the market opened and rose to around $146 when the market closed, according to Yahoo Finance. On Jan. 27, the market opened with a rally when the price of GameStop’s stock rose to around $311. This was an extreme case of short squeezing, where the price skyrocketed so much that short selling hedge funds lost billions of dollars according to Business Insider.
Farley points out the significance of this, saying, “Hedge funds losing money as they did with this GameStop incident was especially concerning for them because these funds they are investing are not theirs.”
The short squeeze caused Robinhood, one of the largest free investment apps for the stock market, to temporarily remove buying options for companies like GameStop and AMC. According to Katie Canales and Tyler Sonnemaker of Business Insider, Robinhood stopped restricted trade on these stocks because of “financial requirements.”
This caused an uproar on the internet, especially from internet personalities such as Dave Portnoy and Elon Musk who called out Robinhood for illegally halting trade, and causing the stock to crater, according to Peter Tchir of Forbes. Robinhood’s decision caught the attention of politicians as well. Rep. Alexandria Ocasio-Cortez and Sen. Ted Cruz both agreed that this action needs to be investigated by the Financial Services Committee to understand why Robinhood made a decision that cost people thousands of dollars after the stocks fell.
Eventually, Robinhood lifted the restrictions, but by the time they did, those stocks had drastically fallen. However, the damage to Robinhood’s reputation is cemented. Robinhood’s decision caused many people to raise complaints and drop Robinhood as their platform for investing.
What happens now?
Eventually Robinhood will be questioned by Congress for their actions in January. This event will be a lesson for years to come about investing. It shows that investing in the stock market is similar to gambling, where people can make hundreds of thousands of dollars and lose it in a matter of hours or days (Business Insider).
“Investing is not a game! A lot of people hit big on GameStop, AMC, or BlackBerry, but the same amount of who did, also lost,” said Farley. “These companies are overvalued, and it came down to gambling on if the stock price was going to keep going up because other people thought the same. An educated investor is going to make decisions on what companies they invest in. I would argue that throwing $100 at GameStop because you saw something on Twitter is not investing. [It’s] more related to gambling.”
There will most likely be increased regulations after this, but what occurred on Jan. 26 will be remembered for a long time. Not just for the memes about ‘GameStonk’, or ‘To the Moon’, but for those that work in the business world as well.