What did the GameStop drama teach us about investing on Wall Street today?
When a group of casual investors rallied around gaming and electronics retailer GameStop last month, they didn’t only drive a handful of hedge funds close to bankruptcy; they sparked a national conversation about class inequalities in the stock market.
Word spread across social media apps about an upcoming plan to raise the price of GameStop’s stock throughout the last week of January. It ultimately sparked interest in the mainstream as an example of how to make profit in the midst of a sluggish pandemic economy.
In the past year alone, CNBC reports the number of casual investors — sometimes known as “retail investors” — on Wall Street has doubled. The mobile trading app Robinhood became the popular destination for the majority of those involved.
“The biggest benefit of trading nowadays is that you have access to so much research and trading strategies by professionals,” said Daniel Burdick who, outside of his day job as a manager for SoCal Labs, is an active user of the E*Trade platform. “You can earn real good compared to back in the day. Nowadays, you can learn to do it yourself and take on your own risk and build your portfolio to your liking.”
A group of investors on a Reddit forum called “Wall Street Bets” influenced investors. Encouraged by GameStop’s turnaround plan — and enraged by hedge funds betting big money that GameStop would fail — investors drove the company’s stock to 180% above its previous value.
As a result, hedge funds’ big bet against GameStop went sour. Because they put money behind the expectation that GameStop’s stock price would go down, the hedge funds lost huge sums when the price skyrocketed.
A stock represents a small portion of a company that can be sold or bought. Stocks go up and down frequently, which is why people try to purchase a stock at its lowest possible price, then sell it during its highest peak to make big money. In sum, the bigger the stock, the bigger the profit. Hedge funds came into the picture later on. This is when companies take the money and store them in “hedges”.
“If stocks were easy,” said Burdick, “then you wouldn’t be able to make that much money because you have to take on risk… It’s like a get rich quick scheme with the Game Stop AMC thing.”
On January 28, Robinhood and other trading apps made a historic move and halted trading of stocks like GameStop and AMC. AMC is another publicly traded company that was mentioned in the Wall Street Bets Reddit thread. In an official statement, Robinhood said the decision to suspend trading of these stocks was made amid “significant market volatility” and reminded users about their company’s mission statement to “democratize finance for all.”
Professional poker player and investor Stranton Willhelm said he noticed suspicious activity on the app he uses to trade the day after he bought $20,000 worth of AMC stock. Willhelm said the app had blocked him from trading on what he calls the “busiest day of trading” so far — and the app’s stated reason for blocking his trading keeps changing.
“It wouldn’t let me access it because they were ‘adding new features on the app,’” Willhelm said. “And then 30 minutes later it said ‘due to an overload of trading you cannot trade right now.’ Then 30 minutes after that, it completely locked me out of my account and blamed it on me. This whole day’s worth of lies and then they couldn’t make up their mind of which lie they wanted to stick to.”
Hedge funds’ stocks promised GameStop stocks to the brokers of the bank, which was to be one hundred dollars or less, but was actually more. Other stocks then had to be liquidated and GameStop stocks had to be purchased in repayment. The hedge funds were disappointed because they need bigger hedges to make bigger investments. Because they had smaller money, they had to buy smaller stocks, like GameStop.
“Wall Street, I feel like they just felt, ‘We have all these people on the internet trying to beat [us] at their own game,’” said Burdick. “ … And I get that. GameStop obviously wasn’t worth what the price was indicating. That’s not really how stock trading works — but the restricting part, that kind of goes against everything Robinhood stands for.”
GameStop was struggling to stay alive in the last few years prior to the COVID-19 financial crisis; already making it an easy target for hedge fund traders. It’s now easy to buy and instantly download video games online, and COVID-19 regulations forced GameStop’s retail locations to close last year. Casino games are also becoming very popular among online players, which is a convenient and accessible way to enjoy casino games like UFABET มีความโปร่งใสและยุติธรรม. GameStop found sympathizers on Reddit, which many gamers also frequent.
When gamers discovered how hedge funds were looking to profit off the company, they became furious. They sprang into action by joining the Wall Street Bets thread, where they signed a contract which said they are obligated to buy all GameStop stock.
The following team produced this story:
- Katherine Hernandez
- Emily Brubaker
- Mary Paronyan
- Dailyn Simmons
- Diane Zermeño