McElhinney: The GameStop stock drama was too good to be true


Dicoplio Family, CC BY-SA 2.0, via Wikimedia Commons

Thousands of people, mainly from Reddit, bought GameStop shares and negatively impacted hedge funds in the process.

Kate McElhinney, News Editor

January is generally coined as the longest month of the year, and 2021 was no exception. Many tweets on Jan. 27 referenced what was called the “four I’s of January:” Insurrection (referring to the Capitol riots), Impeachment (self-explanatory), Inauguration and Investments, the last of which is the most recent.

Reddit is a discussion-based website that contains just about everything in existence, from r/chemistryhomework to something a bit more well-known at the moment, r/WallStreetBets, which grew to approximately 8.7 million members throughout the course of a few months. Through this forum, thousands of Redditors– many of whom were not much older than MSMS students– bought shares in a popular video game store, GameStop (GME), eventually causing a drastic 3,000% rise in the stock’s price. Some current or graduated MSMS students already buy and sell stocks regularly, so seeing something like this happen among Gen Z and millennials was surprising, especially considering the fact that people I know could have participated. 

Because GameStop is a declining business, with most game purchases being online for COVID-19 safety, many hedge funds “bet against” the company through short selling. Essentially, this means that they sold their borrowed stocks in the company with the intent to buy them back at a lower cost after the stock price inevitably decreases. This is an effective way for big companies and investors to make easy money off of dying companies. Yes, it sounds sketchy, and it is, but apparently, people make a lot of money from it. However, if the stock price rises, the investors still have to buy the stocks back, and they end up losing large sums of money in some cases. This is a rare occasion, seeing as many leading hedge funds and Wall Street investors control the market to work in their favor, but if a large enough group tried to work against them, it could potentially work. 

This was one of those cases. Retail investors rallied together through the platform r/WallStreetBets on Reddit to raise the stock price of GME. Many were angered by how hated GME was by Wall Street investors and hedge funds– specifically Melvin Capital– who all invested through short selling with high expectations for the stock price to decline. Many hedge funds manipulate the stock market to work in their favor through various tactics like spreading misinformation, and this was another factor that led to the amateur traders’ upset. The stock traders on Reddit agreed to buy stocks from GME, causing the Wall Street investors and hedge funds to pay large sums of money to buy their sold stocks back before the stock price rose even higher. Media coverage from national news outlets led to an even larger rise in GME stock prices.

At first, it was great. Lower-income people had the opportunity to spend a small amount of money and make a large amount in return. All was well until people got ambitious. Stock prices peaked at almost $350 per share on Jan. 27, after costing only about $15 one month prior. Investors continued to buy stocks of GME in the hopes that the price would continue to rise. However, nothing good lasts forever. Discord banned the WallStreetBets server and RobinHood, the unofficial platform of choice for the Redditors due to its flashy design and easy accessibility, heavily restricted transactions for GME stocks, limiting who could buy and sell GME stocks and causing a lot of traders to lose money. While RobinHood claims to have done this for safety and to ensure that they had enough money to continue their business, the timing of the restrictions didn’t support that. Immediately after the restrictions, the GME stock price dropped, so it feels like RobinHood did this in an effort to benefit the hedge funds and wealthy investors, because it certainly didn’t help the Redditors. People who did not immediately sell their GME stocks after its dramatic rise were faced with a heavy decrease in stock prices, forcing many to sell their stocks for less than half of what they originally paid for them. What seemed like a miracle became a nightmare, and most of it could be attributed to the lack of stock market knowledge many of the stock traders had. As iconic as it was that so many young people were able to cause so much mayhem, most of them were very new to the stock market community, and it ended up being detrimental for most.

In the end, some people made large sums of money, but a lot of people lost money. As good of an idea as it seemed, the odds are stacked against everyday investors, with all favor going to larger and richer Wall Street investors and hedge funds. If the Southern District of New York loses its lawsuit against RobinHood, the app will be able to restrict transactions and delete accounts (as stated in their terms of service) as it pleases, which will likely target less experienced investors. Many wealthy Wall Street investors treat the stock market as a computer game and continue to benefit from it, but when lower class or middle class people try to do the same, it’s not credible and needs to be stopped. 

This is the first time that amateur investors have taken on a large hedge fund like Melvin Capital and won, and it may not be the last. Buying and selling stocks takes almost no effort nowadays, allowing for more and more novices to join the stock trading community daily. Many of these new traders know little to nothing about the stock market, and overzealous trading may become a normality for many, especially considering the young age of the newest members.

Investing in stocks can be a safe way for people to increase their revenue with little to no effort, but it takes some knowledge on how everything works first. Until people have that, I don’t foresee another event like this happening much in the future, no matter how happy people were to see the temporary downfall of larger hedge funds and Wall Street investors.