You may have heard about the recent surge of subreddit r/WallStreetBets members investing in GameStop stocks, resulting in a discombobulating disruption of Wall Street hedge funds and the stock market. You may have even felt happy if you heard it explained as the little man playing the 1% at their own game. How does such a thing happen?
As an in-store gaming retailer, GameStop stocks have been slowly depreciating for quite some time. This provided hedge fund firms such as Melvin Capital and Citadel an easy target for a short-sale. In short-selling, traders borrow shares of an asset, often from deep hedge funds, and purchase stock that they believe will fall in price out of lack of demand. Once the stock falls, they return their shares and successfully pocket the difference. Or, at least that’s the plan.
Because it is possible that a stock’s price will rise rather than fall, short-selling can be a risky business. Amateur traders of subreddit r/WallStreetBets in Reddit, an online aggregation of interest-based communities, proved this risk when they initiated a short-squeeze to save beloved brick and mortar store GameStop from going under. Unifying to buy GameStop stock in large quantities, Redditors successfully created demand, thus raising stock prices. This effectively squeezed Wall Street hedge funds out of their position, instead moving them to near bankruptcy.
With GameStop stock now plummeting, r/WallStreetBets constituents hold out from selling with hopes that another spike is still to come. Meanwhile, hedge fund companies work to regain a financial hold.
Clark College economics professor Patricia Atkinson notes that as long as there’s financing, the gambling can proceed.
“Again, it’s a bet,” Atkinson said. “Why would you give someone a million dollars? You think in the long run, they’re a safe bet. If you didn’t think they were a safe bet, you wouldn’t give them a million dollars.”