Market Watch: r/WallStreetBets and the Great Game Stop Squeeze

The pandemic has seen to the rise of many ways to make a quick buck, be it grifting, scams, or investing. The latter has caused quite a stir in the marketplace, as first-time investors flooded trading apps such as Robinhood and Coinbase in the last few months. 

In January of 2021, the reddit thread titled r/WallStreetBets hinted to its 2 million subscribers that major investors were betting on video game company Game Stop going bust. Major investors shorted Game Stop stock (this is when an investor borrows a stock, sells it, then buys it back to return it to the lender) with the hopes of seeing it collapse and to make a profit from the stock’s low price. Investors began to short more stocks, resulting in more short positions than actual shares. This resulted in a huge demand and low supply. Realizing this, r/WallStreetBets subscribers decided to buy the stock and hold it, causing the price to go up. This is called a short squeeze, where people with shorts desperately try to buy up the stock so they can return shares to the lenders before the price gets too high. At this point, these short sellers are losing money, but are attempting to prevent bigger loses. Ultimately, redditors made a lot of money, and short sellers lost big.

This of course caused a frenzy on Wall Street as fat cats and major investors lost an estimated $13 billion on Game Stop alone. The White House said it was monitoring the Game Stop situation and warned that “extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence.” It also stated that it would “protect retail investors when the facts demonstrate abusive or manipulative trading.” Some other ramifications of the great short squeeze were the restricting of stock and cryptocurrency trades on apps such as Robinhood.

Though a lot of these investment episodes start as jokes, it is important to educate yourself about the potential major consequence of trading, and to never be too easily swayed by “tips” that are passed around by internet investors. If you are going to get your toes wet and invest in the stock market, be aware of the pitfalls involved and never invest more than you can stand to lose.

Source:

https://www.vox.com/the-goods/22249458/gamestop-stock-wallstreetbets-reddit-citron