Despite being a failing business on the verge of bankruptcy, GameStop’s stock market price skyrocketed in January costing Wall Street billions. This was thanks to the interference of a Reddit community of amateur traders, but how did they do it, and can something like it happen again?

The Curious Case of GameStop’s Stock Market Success

The Big Rise.

In January of this year, something weird happened with GameStop. GameStop’s stock price rose from a steady $4 per share during the majority of 2020 to a massive $347 per share by the end of January 2021. GameStop’s share price also shocked onlookers by growing over $250 in just 2 days! This level of growth is not unprecedented in the stock market but it is unusual considering GameStop’s annual revenue has declined by over 20% in each of the last two years. Furthermore, at the time of the stock price surge, GameStop had 450 fewer stores operational in the USA than they did at the same time the previous year. So if performance wasn’t driving up the stock price, what was?

The Big Short

It was actually GameStop’s vulnerable and precarious position that attracted stock market attention, not to buy shares, but to short them. Shorting shares essentially means loaning the shares for a fee and selling them on to another buyer only to later buy them back at a future date, hopefully at a lower price, in order to make a profit, and return them to the lender. The best result for someone holding a short position is for the stock to become worthless, the company to go bankrupt, and become delisted from the stock market. In this scenario, the person holding the short position no longer owes stocks back to the lender as the stock no longer exists and they make the maximum profit as a result. It was exactly this which attracted investors to GameStop, there was blood in the water as the company’s business model was becoming increasingly obsolete and profits rapidly decreased. The Wall Street sharks were circling, shorting the company’s stock in massive numbers in hope of its seemingly inevitable bankruptcy.

Enter r/wallstreetbets

Usually, the shorting tactics employed by Wall Street would work, but this time there was an unforeseen force at play that would give Wall Street a headache, Reddit! r/wallstreetbets is a forum composed of many amateur investors who mainly use free trading apps and make relatively small investments. These amateur traders in this subreddit were able to expose a weakness in Wall Street’s short position. 140% of GameStop’s shares had been sold short meaning some shares sold short, had been sold short again, this meant there were now more shares owed than actually existed. r/wallstreetbets network of amateur investors immediately started buying up GameStop stock to try to trigger a ‘short squeeze’ i.e. raise the price of the stock to trigger short position holders to try and cover their losses as quickly as possible creating a hugely competitive race to buy stocks before the price goes up further. This race only further increases the stock price as demand skyrockets leading to higher losses for Wall Street and more profit for the Reddit investors. The short squeeze worked and the stock price rose astronomically making the amateur investors involved a lot of money and costing Wall Street billions.

GameStop’s Stock Market Saga’s Legacy

This GameStop incident caught the attention of global media which is an impressive feat during a global pandemic. This story epitomized the David and Goliath story where amateur investors banded together to take huge profits from Wall Street. This story has proven an inspiration for many people to attempt stock market trading with r/wallstreetbets rising to 10 million followers and trading apps having hit record numbers of users. These trading apps are becoming quite a common trend and are being marketed frequently now online and on television. The apps have served as a means to remove barriers of entry to the stock market to allow average people in. But is this desirable? Prominent investor Michael Burry, the man who famously predicted the crash of the American housing market and the global recession, has weighed in. 

“The market is dancing on a knife-edge”

-Michael Burry

The increase in day traders, social media tips, and meme stocks have all contributed to a market bubble in his opinion, he is ominously warning that this bubble could pop with serious consequences at any moment. So while casual traders like those at r/wallstreetbets do have the opportunity to make money fast on the stock market, do they also have the power to crash the global economy? Micheal Burry and many others seem to think so. Does the influence of social media such as Reddit need to be managed and the marketing of, and access to, trading apps need to be managed to protect the global economy?