GameStop stock skyrockets in effort to beat Wall Street
GameStop in Stonestown appears quiet, but not long ago, the company was making noise on Wall Street as thousands of Redditors united to create a surge that boosted the company’s stock 1,000 percent.
May 4, 2021
On Jan. 28, a large number of users on the subreddit r/wallstreetbets came together in an attempt to beat Wall Street hedge funds at their own game, by massively inflating the price of a few stocks.
By using Reddit as a forum to communicate and coordinate, millions of individual investors boosted BlackBerry’s stock by 280 percent, AMC’s stock by 840 percent, and GameStock’s stock by 1,700 percent, all on that one day.
Part of the reason for this incredible boost was that certain stocks were being devalued by hedge funds in a process called shorting. The way it was described by Brian Davis, math teacher and former bonds trader, is, shorting involves borrowing a stock for a fee, then selling it and buying it back when it is cheaper to give it back to the lender. This way, a hedge fund can make money on a stock without actually owning it, as long as it is losing value.
Davis also mentioned that shorting is very dangerous for hedge funds, because if they guess wrong and the stock starts going up, they have to spend money one way or another. If they wait to buy the stock back to return it to the lender, they lose money on fees. If they buy immediately to minimize fees paid, they still lose money off the rising stock price.
This exact incident happened to the hedge fund shorting GameStop stock, apparently according to the plan some inappropriately named redditors had developed.
However, neither Davis nor David Elu, an economics teacher, were surprised that a group could use social media to organize this way.
Elu specifically remembered, “I think it was (Egyptian President Hosni) Mubarak that they nearly threw out of office, just by use of social media. And so, the use of social media is a very powerful tool.”
On the other hand, Jeremy Villeneuve ’21, a student who took Elu’s course, claimed that r/wallstreetbets has been attempting something similar for some time now, but he never would have expected them to successfully boost a stock’s price by over 1000 percent.
The price of GameStop stock has since crashed, returning to more normal levels. Davis expects that the markets will stay stable and normal for a while at least, but keep an eye on the markets for any other big changes.