Throughout the pandemic, people all around the world have found themselves staying at home with nowhere to go. By investing in stocks, some are given hope and excitement allowing themselves to forget about their worries. Investors usually wait to purchase a stock when it decreases to a reasonable price, and wait to sell it when it is at a higher price in order to make a profit. Stock price can either increase or decrease depending on how many people want to buy the stock. While there can be many benefits that come with waiting to sell a stock, there is also the risk of the market crashing and losing all your invested money.
Not only can people purchase stocks, but they can also predict when a company’s share price is going to go down, which is also known as shorting stocks. This is a common practice done by multimillion dollar companies called hedge funds, where the companies sell large amounts of shares at once, lessening the value of the original price for their own profit.The online community r/Wallstreetbets, which is made up of over 3.5 million Reddit users who discuss trading ideas and strategies, noticed that this practice was being used on the dying company GameStop. In order to expose this practice, amateur traders began to buy GameStop shares causing a spike in the stock market on January 11. Since the price of the shares was increasing after hedge funds had sold, they were forced to return the shares to the shareholders they had borrowed from or buy them back at a significantly higher price resulting in major losses for the hedge funds. As the stock price began to rise, Elon Musk, founder of Tesla and SpaceX, tweeted a link to the Reddit page encouraging the public to invest in GameStop. Although hedge funds may have lost a lot of money by shorting more shares than even existed, Reddit users who purchased shares with the intent of forcing the price to rise made a great profit. However, amateur traders were not the only ones to make a profit; for example, NBC states that “BlackRock, which operates mutual funds, may have made billions of dollars from the rise in GameStop shares alone”.
Furthermore, people were unsure of how a company who was almost out of business had shares that were worth anywhere from thousands to billions. Forbes notes that “at the beginning of September 2020, TheStreet.com called GameStop “one of the most heavily shorted stocks in the market,” after its shares had been sliding lower for years.” The share price eventually increased from $63 to almost $500, forcing the public to question if a Gamestop share is even worth that much.
As Reddit users continued to take advantage of the situation and purchase more stocks, trading platforms like Robinhood, an app marketed to amateur traders who want to get involved in the market from home, prevented investors from buying Gamestop shares which made the platform the target of controversy. The Washington Post says, “One hedge fund, Senvest Management, recently boasted to clients that it made more than $700 million from a bet it placed on GameStop in September”. Hedge funds were able to capitalize on the stock market craze easily, making it unfair to ordinary investors who were taking a bigger risk.
All said, it was the Reddit users who caused a company that was going out of business to suddenly be owned by 28% of America. The US Securities and Exchange Commission (SEC), is currently investigating to see if the stock market was manipulated and if members of the Wallstreetbets are at risk for criminal prosecution.
Investing in the stock market is all about timing. If you sell your stock too quickly you could regret that decision, and if you wait too long, the market can crash and the stock price will be worth even less than what it was bought for. Knowing the risk that comes with investing does not stop amateurs who are now encouraged to invest in other companies that are struggling such as, AMC Entertainment, American Airlines, and Blackberry. The rise of the Gamestop’s share price has forever changed Wall Street’s history and the way future investors think.