It’s been nothing short of an eventful week on Wall Street, as amateur investors sought to overthrow hedge-fund short-sellers by taking GameStop stock to unfathomable heights.
In just a matter of days, shares of GameStop surged up to 1,600% as individual investors rapidly purchased stocks in an effort to short-squeeze hedge fund investors. During the week, individual investors sought to catch hedge-fund short-sellers on other fronts by purchasing mass amounts of AMC Entertainment Holdings and Nokia stock as well.
“It’s a situation that just got crazy,” Scott Teter, wealth management partner at Channel Wealth in Santa Barbara, told the News-Press.
Short-selling can be a risky business, but it is a bet a lot of hedge-fund investors are willing to make due to its money-making potential. Essentially, when an investor wants to short-sell, they borrow shares from another investor and sell them immediately. Then, when the price of the stock goes down, they repurchase the shares and keep the difference.
Oftentimes, hedge-fund investors will short-sell with stocks they believe are going to drop in price. In the case of what has happened on Wall Street this week, many hedge fund investors had been betting against GameStop, assuming it was going to decrease in price.
Being aware of this, amateur investors began buying GameStop stock in mass amounts to drive up the price of the stock, exposing short selling hedge funds to monumental losses.
Many of these amateur investors were spurred by a Reddit page called r/wallstreetbets, where users are colluding to wage war on Wall Street.
“Friends, we’ve done good,” one Reddit user wrote on the page. “We’re writing history, doing incredible things. Brokers are on their knees. Short selling hedge funds are over.”
Though many individual investors are riding on a high now, stockbrokers and analysts suspect the mass purchasing of these stocks will lead to huge losses in the end for many individuals.
“Although I think there are some individuals who made a ton of money from (GameStop stock), there’s a lot of people who are losing,” Dylan Minor, chief strategist at Omega Financial Group in Santa Barbara, told the News-Press. “It’s pulling some people in who wouldn’t normally be doing these kinds of things and creating improper expectations as well.”
He added, “How you build wealth over time is not speculation. It’s saving and investing over time.”
Controversy arose Thursday as popular investment app, Robinhood, barred users from purchasing GameStop, AMC, Blackberry, Bed Bath & Beyond and Nokia stock, citing high amounts of volatility in the marketplace. Other investment platforms, such as TD Ameritrade, also placed a trade ban on GameStop and AMC.
Robinhood users reacted in an uproar when the trade ban was announced, and a class-action lawsuit against the trading app was filed soon after the announcement was made Thursday. Due to the ban, GameStop’s stock dropped significantly Thursday, from $469 per share at the start of the day down to $197 per share at the close of the day.
Even congressional representatives reacted in horror.
“We need to know more about Robinhood’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade stock as they see fit,” Rep. Alexandria Ocasio-Cortez, D-New York, tweeted. “As a member of the Financial Services Committee, I’d support a hearing if necessary.”
Friday morning, Robinhood corporate reversed course and announced in a statement that investors could purchase “limited buys” of the previously banned stocks. With the ban released, GameStop’s stock skyrocketed 235%, closing the day at $325 per stock.
As amateur investors do not plan to bow to Wallstreet anytime soon, the events of last week are raising questions over the role of social media in market manipulation.
Moving forward, Mr. Minor believes social media sites like Twitter and Reddit will have to consider monitoring chatter about markets on their sites in order to keep the market stable.
“I do think those settings, like Reddit, where you can be really anonymous and do all kinds of questionable things… that can become problematic in terms of operating at markets,” Mr. Minor said.
He later added, “I do think to the extent that these sites are being used to manipulate markets, that it is in no one’s best interest besides criminals.”