What Actually Happened with GameStop?
Updated: Nov 12, 2022
By now, we all have heard people gossip about GameStop, Reddit, the stock market, and Wall Street. If you tuned out because it was too much and got too confusing too fast, I can’t blame you. It really feels like you have to be a finance guru to understand what’s going on in Wall Street and the wild week the hedge funds have had. I can’t blame you, the more I look into stocks, the more my head hurts. But if you are going to take one thing away from this article, then let it be the idea that the “Reddit rebellion” could definitely change the future of investing on Wall Street. Nonetheless, what actually happened?
Basically, the issue concerning GameStop surrounds two different groups of investors: amateur and pro traders (known as short-sellers). The “amateurs” contain a group of young investors who are all a part of the Reddit page “WallStreetBets.” According to Richard Fisher (the former president of the Federal Reserve Bank of Dallas), the group of Redditors “has seen the rich get extremely rich by taking advantage of cheap money, and they want to get their piece as well.” Their goals were simple: 1) augment stock prices so they can gain profit and 2) force top tier investors to abandon their bearish bets against companies such as AMC and GameStop.
For context, there are people on Wall Street who were betting against those stocks, betting that those shares would eventually crash (just as if you were betting for the Giants to not make the playoffs). Additionally, these are the same people that investors rely on to make smart and ethical decisions to boost their own portfolios (which is all the stocks they invest in to make a profit). However, these men and women are not widely loved given that they are associated with the system that created the crisis back in 2008. Hence, these WallStreetBets subreddit would be more than happy to watch these short-sellers lose billions and billions of dollars.
This subreddit noticed that GameStop was being shorted by hedge funds as they believed the video game retailer would have the same fate as Blockbuster. Quick note, when investors short a stock, they buy the stock, sell it, and then buy it again in hopes that the stock price falls. For example, if I “borrowed” a stock from my broker that was one hundred dollars, sold it back to the broker, and then bought that same stock when it was fifty dollars, I would have a net profit of fifty dollars. However, if that stock rose to one hundred and fifty, I would have lost fifty dollars.
To get back to what I was saying, in response, the group of investors bought shares of companies that they thought were undervalued (augmenting their stock prices). On top of the subreddit buying shares, the short-sellers were forced to purchase shares to make up for their losing bids (which augmented the price even further). To put the situation into perspective, a year ago a single share at GameStop was about four dollars, and now it’s well over three hundred dollars. Consequently, all those “sophisticated” investors on Wall Street who were shorting the stock were now losing a crazy amount of money due to the crazy increase in stock price.
"An online flash mob beats Wall Street insiders at their own game” as CNN Christine Roman put it.
But, that’s not all. Some of you have heard discussions with the word Robinhood being tossed around. Basically, Robinhood is a free-trading app that millions of “amateur” investors use. However, once GameStop was surging, this app halted any trades - so the Reddit investors would not be able to pump up the GameStop stock. Because of this, GameStop lost forty-four percent of its value. The issue with this is pretty simple, Robinhood favored the rich people on Wall Street and saved their behinds while hurting multiple Redditors who were trying to make money.
Congresswoman Alexandria Ocasio-Cortez spoke out on Robinhood and said that decision was “unacceptable.” There was even a lawsuit filed against Robinhood. To put it all in short, there was a big house fire, but then that house fire spread, and now the entire town is up in flames. Nonetheless, Robinhood let users resume activities which made the stock price surge once again.
With that being said, you might be even more confused in all honesty - stocks are not an easy topic. But if you want to take something away from it, just know that Wall Street will forever be changed. Additionally, this is a prime example of how the “average person” can cause a big ripple and hurt the many powerful organizations that damage our country. People may not believe that they can do any harm or change because they are just “simple and random” people, but if 2020 has taught us anything, it is that the common folk can stick it to the big man: they did it in November and they did it now.