Gaming the System – The Reddit Stock Market Takeover – Explained

by | Jun 2, 2021 | Business

The stock market can be an intimidating place for a new investor. For your average American living paycheck to paycheck, buying stocks may feel like a pipe dream. This is especially true for Millennials. Despite the rise of micro-investing apps like Robinhood or Betterment, the stock market can seem inaccessible to many young adults still struggling to get a hold of their finances in increasingly difficult times. Yet, this year, in the middle of a global pandemic, a group of internet vigilantes took action to show that the power can be in the hands of the people—actions that resulted in a massive boom in one retailer’s stock prices.

So, if you’ve been seeing a resurgence in stories about Redditors and GameStop stock, here’s a quick breakdown.

What Is GameStop?

For those unfamiliar with the gaming giant, GameStop is a video game retailer with stores in malls and strip malls across America. While there are various mom and pop games stores and competitors, GameStop is a bit of a one-stop-shop for gamers’ needs. Everything from games and systems from nearly every major developer—PlayStation, XBox, Nintendo and more—to merchandise from the most beloved franchises, can be found all in the same place, making it a haven for gamers and harried relatives seeking gifts for the gamers in their lives. They even buy back and sell used games and systems, allowing customers to get the gaming experience they’re looking for at a much cheaper price than big box electronic stores like Best Buy.

Why Was GameStop Trending?

At the beginning of this year, GameStop had been experiencing a bit of a downturn in the market, which was to be expected of most retailers during this quarantine. This meant regular investors participated in short selling, the practice of borrowing shares of stock, selling them at market price and buying them back once the value has gone down. Short selling is typically a tactic that should only be practiced by experienced, professional investors, as it relies on advanced projections and the confidence that the business in which you are investing will continue to fail. To said professionals’ dismay, however, the regular cycle of borrow, sell, buy back was disrupted from an unusual source of new investors: Redditors.

What Is Reddit?

Much like any other forum, Reddit is a website with a diverse subset of communities. From fan pages for celebrities and sports teams to trending videos and obscure memes—you name it, there’s a subreddit for it. The community that gained such a huge amount of attention these past few months was r/wallstreetbets (WSB). This subreddit is a place where stock enthusiasts discuss various businesses and help one another navigate the tricky world of amateur investing.

How Did Redditors Drive up GameStop Stock?

On January 11, 2021, stocks for GameStop (abbreviated to GME for its stock ticker) rose after the company announced three new members of its board of directors to appease shareholders calling for major change in the way the business was run. With this uptick, a number of short sellers jumped ship, causing even more growth in the days after. This only led to the brazen amateur traders of WSB to buy up more stocks, encouraging one another to strike while the iron was hot.

It was not long before the spike in stock prices alerted the mainstream media of the short squeeze (a term used when investors who had been betting on the stock prices to fall wind up taking a loss). With the wider news coverage, more and more amateur investors flooded in, buying up stocks that rapidly rose from around $40 to nearly $400. All the activity led to GME stock becoming one of the most popular stocks to trade across the market.

What Was the Public Response?

When tech mogul and world’s wealthiest person, Elon Musk, got in on the action, tweeting “Gamestonk!!” (as a play on the chatspeak word for stock), the story officially became world-wide news and stock prices continued to rise. While many professional Wall Street investors raged against the sudden siege of stocks they had simply assumed would continue falling and lining their pockets, most people outside of the industry noted that this was simply the free market at work.

As bystanders watched Reddittors continue to post encouragements to “BUY BUY BUY,” it was hard not to get in on the excitement. As redditor u/Pearljammer79 put it in a lengthy post, “This GameStop story is absolutely epic, a thing of beauty and very inspiring. … The 1% have taken advantage and exploited the rules of their own game for years. Now the other team developed a strategy to fight back and turn the game upside down on them that worked. … The people have more power than they realize.”

On the 27th, U.S. Representative, Alexandria Ocasio-Cortez pointed out the irony of Wall Street’s poor reaction, tweeting, “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.” This statement stood to echo the sentiment of WSB, other amateur investors, and the interested public alike.

Even Alexis Ohanian, one of Reddit’s co-founders, agreed, tweeting, “The public is doing what they feel has been done to them by institutions.” He remarked on the nature of the pandemic and the financial losses experienced by individuals and institutions alike, saying “This is something to believe in.” Ohanian did, however, offer a word of caution to the new investors, concluding his statement with “And also – please – don’t invest money you can’t afford to lose, ESPECIALLY, in risky investments.”

How Has This Affected the Market?

While these events have certainly shaken up an industry that operated for so long without much interference from individual investors, it’s hard to say how much the market as a whole has been affected. Many professionals have concerns surrounding the excitement of amateur investors potentially inflating stock prices and going against their own best interest to do so. As Robinhood became the platform of choice for many WSB investors, it’s safe to say a decent number of first-time investors dove head-first into investing large amounts of money without having a solid understanding of how the market actually works.

That said, WSB and other amateurs view this situation as a win, not just for themselves but for individual shareholders in the market as a whole. After all the commotion, it is likely that Wall Streeters, hedge funds and other large corporate investors will think twice before counting out the impact that can be made by individual retail investors.

What Happens Now?

In the end, a short squeeze is rarely long-lived. Stocks are like gravity—what comes up must come down. But that doesn’t mean the fight between retail investors and short sellers is over. In fact, WSB has had other targets in its sights throughout the GameStop takeover, including AMC Theaters, Bed Bath & Beyond, and more. Though there is no telling if what happened with GameStop can ever be replicated. After all, due to the nature of the company in question, most investors were in it for the love of the game.

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Jordan Miller