Gamestop and Social Media’s Powerful Influence on the Stock Market
Photo Credit: shutterstock.com/TY Lim
By Zachary McGraw
From early January to early February of 2021, top hedge funds including Melvin Capital and Maplelane capital lost more than three and a half billion dollars shorting Gamestop stock. The world of finance was not only shocked by the downfall of these major hedge funds, but who was behind them: an army of recreational Reddit investors. Historically, trading stocks in WallStreet was only available to the richest in America, but with the rise of technology and the internet trading stocks became accessible to the average person. Reddit investors are investors on the social media platform Reddit. On average, Reddit users have very little money compared to investors working on WallStreet.
In early 2020 major hedge funds started shorting Gamestop, which is essentially betting against a company in hopes that it fails. When a hedge fund shorts a stock they lend a stock from a broker, sell it to someone else and buy back the stock when it's at a lower price, gaining money in the difference from which they sold the stock to another person. The hedge funds believed Gamestop, an electronic and video game retail company, was overvalued. Amateur day traders and members of the WallStreetBets Reddit community saw how much hedge funds were betting against Gamestop and came to the conclusion that it had become undervalued. The strength of the Reddit investors together turned out to be too powerful for the hedge funds as the stock did not lose value and many Reddit users cashed in thousands, and millions of dollars for investing against the hedge funds shorting game stop.
Many see this as a turning point in Wall Street as investing is finally going mainstream for the common people; Jason Holt, a tech venture capitalist said, “the rise of social media has changed Wall Street because now the average person has access to the tools of the top investors and can play the same game as the investors that they would not have been able to twenty or thirty years ago.” Melvin Capital and Mapalene ended up getting out of the stock, a win for the “little guys” who usually end up paying for the risky and often corrupt moves made by these elite corporations. Yet, this situation still proved that the game was stacked against the common man, as Robinhood, an investing platform, closed buying Gamestop in an attempt to help the hedge funds that invest in them.
Bennet Leary an Athenian student said, “It's ironic that these hedge funds have been doing this type of stuff forever but when regular people band up and play by the same rules they complain and say it's unfair and the whole system shuts down.”
The facts back up Bennet Leary’s claim; in the past the government has consistently bailed out top banks in times of financial crises started by those same banks. Many Reddit investors grew up during the 2008 recession and were exposed to the crimes committed by Wall Street banks and the clear revolving door between top members of the government and Wall Street. Biden’s Treasury Secretary Jannet Yellen is even on the hedge fund Citadel’s payroll.
Others believe that we are diving into a dangerous territory where amateur investors are getting into areas that they do not fully understand. Jack Lucas, student at Athenian and a member of the Reddit community pointed out, “While I think it is refreshing that normal people finally won, I think it is dangerous to artificially inflate stocks no matter who you are.”
While some made millions investing in Gamestop, there were just as many losers; many amateur investors who followed the crowd lost their entire life savings. The stock market wasn’t supposed to behave like this and now many avid investors will be looking to the government to see how they respond to this. The government might choose to put more regulations on the stock market to ensure no one can do this again or they will take regulations down in hope of a more equal playing field.
