GameStop, Reddit and the short squeeze: How amateur investors influenced the stock market

The GameStop logo pops out of a cement wall.

As of late, the events occurring within the stock market have found their way into mainstream culture. Let’s take a look at how hedge funds, GameStop, and Reddit are all connected to what CNN is calling “the worst short squeeze in a quarter century.” 

The frenzy began when members of the online social media platform Reddit began driving up the price of GameStop stock by buying large amounts of shares, and therefore increasing the demand and price of GameStop shares.  This stock price increase began around Jan. 13, according to NPR, and it came about because of a Reddit forum called “wallstreetbets.” 

“Wallstreetbets” is a forum in which Reddit users, or Redditors, share memes, trade tips and analysis. According to CNN Business, the forum is “fond of targeting short-sellers,” and the BBC states that many Reddit threads say that the short squeeze was “payback” against the “big money companies seen as causing the financial crash in 2008.” The Independent stated that the actions taken to cause the short squeeze were taken in order to “send a message to the short-sellers.”

 The forum had about four million subscribers as of Friday, Jan. 29, and has 8.5 million subscribers as of Thursday, Feb. 4. The amateur investors on this forum bought massive amounts of GameStop shares, causing the stock price increase. 

Because GameStop has not currently been a flourishing business--especially during the pandemicsuch a stock price increase was unexpected within the market. In fact, hedge fundsor, according to Investopedia.com “financial partnerships that use pooled funds and employ different strategies to earn active returns for their investors”actually bet on GameStop shares losing a lot of value. 

Betting on which companies will do poorly in the future is commonplace in the stock market. Investors borrow shares in a company they believe will do poorly, and then sell the shares with the agreement that they will buy them back sometime in the future. If the company isn’t doing well financially, the investors make a profit when they buy the shares back, because the price of the stock has decreased. This practice is called “shorting” or “short selling,” and according to The New York Times, it is a risky practice, because if the price of the shares goes up, there is the potential for investors to lose a lot of money.   

When GameStop prices went up, investors who thought prices would drop had to buy their shares back because the price increase was so unexpected, and so large. According to macrotrends.net, the average GameStop stock price over the last 52 weeks was $14.43 a share (as of Feb. 4), and according to The Independent, GameStop’s share hit a low of $2.57 last year; on Jan. 27, 2021, when it reached its all-time-high closing price, the price was $347.51 a share. 

At this point, the market had begun to experience a “short squeeze,” which occurs when a company (in this case, GameStop) isn’t doing anything that would cause investors to stop betting that it will continue do poorly, but the price is being driven up due to the purchase of a large number of shares (in this case, the Redditors caused the price increase).

The price of GameStop stocks has been extremely volatile lately. Following the all-time-high on Jan. 27, restrictions were placed on the trading of GameStop stocks on platforms such as RobinHooda platform that allows people to trade stocks without paying a commission fee. This caused the stock to plunge 44 percent down to $193.60 a sharea price still exponentially higher than in the previous decade. The following day, when some of the restrictions were lifted, the shares rose 65 percent back to $325.00 a share.

Such restrictions on GameStop stocks and other unlikely stocks of which amateur investors began driving up prices, such as BlackBerry, AMC, and American Airlines were criticized by Redditors and lawmakers alike. 

According to NPR, Representative Ro Khanna, a Democrat from California, said that Robinhood’s restrictions "showed how the cards are stacked against the little guy in favor of billionaire Wall Street Traders." 

The BBC reports that Wall Street commentators have referred to the short squeeze as “insane” and “like ‘nothing [they’ve] ever seen.’” 

If the big investors and hedge funds have to raise money that they have lost from the short squeeze, they may have to sell so many shares that the prices of otherwise stable stocks are negatively affected. 

According to CBS News, GameStop’s stock price decreased to just under $54 a share on Thursday, Feb. 4. However, The Wall Street Journal reported on Monday, Feb. 1 that the short squeeze “spark[ed] a surge in silver markets,” though Redditors on “wallstreetbets” state that there is “no silver short squeeze happening.” Even so, as of the week of Feb. 1, the effects of the Redditors’ actions are still being discussed throughout the news.

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