A battle between an army of amateur investors and multi-billion dollar hedge funds has sparked a trading frenzy, causing the stock prices of some previously unimagined companies to skyrocket as they kicked out sellers in the marketplace.
An unlikely beneficiary has been GameStop, a struggling video game retailer that had been hit hard by the pandemic. But what is happening here? Are we witnessing the beginning of a new era or will we return to normal soon?
Some users on Amon Avis believe that institutional investors including the $13 billion hedge fund Melvin Capital saw an opportunity to make a profit by betting against GameStop’s share price or by selling short.
All of this was nothing special until users of a Reddit forum called “WallStreetBets” decided to buy GameStop shares (or options to buy them), initially because they thought it was undervalued and then to send a message to short sellers.
Acting simultaneously, the stock price was pushed to astronomical levels causing massive losses for short-sellers. Libertex has it that the battlefield has shifted to other stocks that have been wagered by hedge funds such as BlackBerry, the AMC theater chain, and American Airlines.
Who Are The Wallstreetbets?
WallStreetBets is a group made up of shareholders and stock investors within the Reddit social network. In one of its forums, these users decided to coordinate and buy the shares of GameStop against the downtrend of the stock market and turn the market around. The company’s shares increased in value by more than 2,500% and investors benefited greatly. Last year March, the company’s shares were set at $3.5, and during this year January, they were worth $366. Since the video game store was not going through a good time, some bears bet short, that is invest against the company and make money if its value fell. Given the new situation, those who bet on its collapse experienced huge losses.
This event demonstrates why short selling can be hugely profitable and risky. GameStop shares hit a low of $ 2.57 last year before climbing to $ 18.84 on December 31 after a notable hedge fund decided to back the company. The price rose steadily, but other funds were betting against GameStop by shorting a large number of shares. At this point, WallStreetBets hobbyist investors entered the fray.
Several Reddit users asked people to buy GameStop stock, which raised the price to put pressure on sellers to short, a process known as a short crunch. A lot of Reddit posts suggested that this was a way to punish hedge funds looking to profit from a company’s downtimes. Other users were more interested in making money as GameStop’s stock price soared. Some funds got involved as well, hoping to benefit from the momentum as the price rallied rapidly.
GameStop’s tumultuous stock market journey demonstrates the power that coordination through social media can have and can make short-sellers rethink betting against a company they believe is in decline. Stock trading apps like Robinhood and the free online availability of information on companies and trading strategies have opened the possibility of investing to more and more people.