The stock market is full of peculiar stories and has seen ups and downs since the beginning. However, this story of how a bunch of day-trading investors on a Reddit forum caused WallStreet to go into a frenzy will blow your mind.
It doesn’t matter if you are a seasoned investor in the stock market or are entirely new to the trading scene. If you have been on any of the news outlets, you would be familiar with the GameStop stock debacle that occurred at the beginning of 2021.
In this article, we will have a close look at one of the most notorious stock runs in the history of Wall Street, which led to an exponential increase in entertainment stock prices of Gamestop. Let us go to the beginning to understand the complete scoop.
GameStop is a traditional brick-and-mortar retail chain that sells video games at over 5000 physical stores. Think of it as the ‘Blockbuster’ of video games. The company was on the verge of bankruptcy due to loss of business and inability to adapt to the growing trend of online gaming. It had been struggling to gain customers for many years. The pandemic didn’t make it any easier, with most consumers moving to the more convenient mode of buying video games online. With the 2020 lockdown of most parts of the world, the GameStop stores were poorly hit, with almost no movement on the streets. However, everything changed in January 2021.
Short selling is a common practice in the stock market where big investors invest in any stock or, in this case, entertainment stock prices that are falling in an attempt to make profits. However, most day traders and small investors don’t partake in this practice, as it requires a significant investment to make a worthwhile profit and has exceptionally high risks.
When an investor learns that a stock is falling or is about to fall, they can still use it as an opportunity to turn up a profit. Traders borrow stocks from investors and brokers and sell them to a third party. Once the stock prices fall, they repurchase the shares at a cheaper rate, making a profit. When the stocks are returned to the original owner, the trader has earned a profit from the falling stock. This is how most Hedge funds use stock selling to make big profits.
Now, coming back to the story, GameStop entertainment stock prices have been short squeezed by Hedge funds for a long time. Several hedge funds had been profiting from the falling GameStop entertainment stock prices. This caught the eye of a Reddit user who posted about it in a popular Reddit community called ‘r/WallStreetBets’ in 2019. However, the post didn’t see momentum until the latter part of 2020.
A stock that was at just $3.25 per share quickly shot up to an 8000% increase within months. During mid-December in 2020, several Reddit investors were interested in the short-selling practice of hedge funds and decided to challenge it. The Reddit community of day-traders rallied to break the chain of short-selling of the GameStop entertainment stock prices and started investing in it.
The movement took some time to build a following. But by the end of January, people from all over the internet and the world started investing in GameStop. Then began one of the most frantic weeks in the history of Wall Street.
As soon as the market opened on Monday, 25th January, the GameStop entertainment stock prices started rising. By the end of Tuesday, the stock price soared up close to $150 per share.
Even the Tesla CEO, Elon Musk, took notice and sent a tweet that said “Gamestonk!!” to his 40 Million followers.
On Wednesday, more people started buying Gamestop stocks which led to a steep increase, resulting in huge losses for the Hedge Funds.
It is estimated that the hedge funds lost a total of $23.6 Billion from this stunt.
To avoid a stock crash, several stock trading apps, mainly ‘Robin Hoods’ including others, declared to block the sale of Gamestop stocks on their platform. This resulted in a sudden decrease in the prices of the stock on Thursday, 27th January. Consequently, the Robinhood app was at the center of a major backlash on all social media platforms from investors. Even State Senator Ted Cruz took to Twitter to show his distress on the unfair practices and demanded an investigation on RobinHood.
On Friday, Robinhood reopened the stock and allowed investors once again to buy them. This shot up the Gamestop entertainment stock prices yet again.
By the end of the week, Gamestop entertainment stock prices had gotten close to a 1500% increase from their starting point in early December.
These ups and downs in the entertainment stock prices went on for a few more days, after which the stocks started to see a steady but inevitable downfall.
This whole fiasco brought several issues and problematic practices to life. Many firms even supported banning the practice of short selling for more ethical dealings.
The episode resulted in billions of dollars in losses for the hedge funds who had invested in the falling stocks of GameStop to turn easy profits.
However, with the intervention of the Redditor and soon the whole world, the falling trend of Gamestop quickly turned into one of the most historic bull runs in history.
Many investors took to Reddit to announce their profits from the trade, with several investors making as big as 1000% profits on their investments.
It was nothing more than just a one-off incident that resulted in an 8000% change in GameStop’s entertainment stock prices. It raises specific questions about the practices in the stock market and brings a critical question to light.
“Was the stock market secretly influenced for political gains by big investors and hedge funds? Should there be new policies and regulations regarding short selling?”