Reddit talk fuels wild stock market ride with GameStop

Gamestop has been the center of attention in the stock market since Jan. 11. According to Jan. 27 reporting from The New York Times, this increase of investors GameStop’s market value increased to over $24 billion from $2 billion in a matter of days. Its shares has risen over 1,700 percent since December. GameStop’s shares have been swinging wildly, going from about $17 at the start of the year to $483 last week and then to $90 by the close of Monday’s trading. 

Gamestop had been struggling financially for years, with the many stores closing down left and right. Due to their decline, Gamestop fell through the cracks of the stock market with no one wanting to invest. That was the case, until a Reddit group named TheWallStreetBoys, waged a campaign to encourage investors to buy stock from Gamestop, claiming that the market was going to have a large boost very soon. 

Greg Aschoff, math department supervisor and self-proclaimed stock market expert, explained that the entire situation was a perfect example of the power of word of mouth.

“There’s this phrase ‘once you’ve heard about it, it’s too late,’” Aschoff said. “A lot of people say that so you know once the hype has reached your attention, it’s probably too late at that point, the stock is going to be on its way down after that.”

According to a Feb. 4 CNet article, Wall Street bet against GameStop so much and for so long that at times it was one of the most heavily bet-against stocks on the market. The heart of the story rests on “shorting” a stock. Short selling is when an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender. Short sellers are betting that the stock they sell will drop in price. What makes the situation ironic is that while hedge funds had shorted GameStop’s shares, betting that its stock was doomed to further decline, the retail investors had been buying shares and stock options. Aschoff believes that investors and analysts will pay attention to other outside factors, like message boards, so they can jump on the bandwagon. 

“Analysts would be wise to watch boards and see these kinds of conversations because that word of mouth will explode,” Aschoff said. “We saw it can cause some incredible effects on something that certainly was not worth $300 or $400 and yet ascended to that level.”

The issue with this dramatic increase in Gamestop’s stock comes down to the fact that retail investors are buying up its shares and short-selling hedge funds are forced to buy back the borrowed shares at a higher price. In Wall Street terms, this is known as a “short squeeze” — a strategy sophisticated investors use against one another. Hedge funds often do not have the money to pay these investors back for such large sums of money at such a fast rate. According to CNet, when the WallStreetBets push drove up GameStop’s share price, establishment investors and hedge funds who’d bet against GameStop started losing billions and billions of dollars.