GameStop, the world’s largest video game retailer, captured the interest of people worldwide — including the University of Michigan community — in a stock exchange frenzy. Over the course of six months, the stock prices for GameStop grew 8,000% and became the single-most traded name on Jan. 26.
Where did it all begin? Reddit.
Members of a Reddit subsection called Wall Street Bets, which has more than two million subscribers, identified GameStop as a target for short selling and decided to take action. Short selling is a strategy many hedge funds employ on stocks that are going down in value. The strategy entails borrowing stocks from a broker on the condition that the broker will be given back the same stocks plus interest. The hedge funds then sell the borrowed stocks at their given price and wait for the price to decrease before buying the stocks back and returning them to the broker, thus making a profit.
Reddit users on Wall Street Bets targeted GameStop as a source of profit and began convincing other users to buy GameStop stocks once they had been borrowed. The goal, according to Reddit users, was to increase the price at which the stocks had to be bought back by hedge funds.
GameStop stock reached its peak price of $347.51 on Jan. 27 and has since fallen to $60.00 as of Monday. It is likely that prices will fall back to where they started, though it can be difficult to predict. At the beginning of Jan. GameStop stocks were valued at $17.25 per share and six months ago they were just over $4.00 per share.
LSA sophomore Matthew Wang, a regular Reddit user, decided to buy stocks from GameStop after coming across posts in the Wall Street Bets subReddit. In an interview last week Wang said he invested $1,000 into GameStop stocks and was surprised by the collective effects other investors had on the hedge funds.
“So, I (made the investment) and then the news spread, and it started shooting up,” Wang said. “I didn’t know what was happening, so I started reading about how there’s a short squeeze happening and how hedge funds are losing money, and I thought it was pretty cool that we can make them lose their money.”
Robert Dittmar, professor of finance at the University of Michigan, said the GameStop situation is referred to as a “short squeeze,” which occurs when a stock jumps its price, forcing investors who bet on price falling to buy it before losing more money.
“If I see a stock that is trading at 50 dollars and I think it is going to be worth 25 dollars, I might engage in a short sale to try to take advantage of that,” Dittmar said. “If everything went well and the stock price actually fell to 25 dollars they would go ahead and buy the stock at 25 dollars, return it to the person they borrowed it from and then they would pocket the difference. They would have sold it for 50 dollars at the beginning and only have had to pay 25 dollars.”
The extreme rise in investment in GameStop stocks initially caused a sharp increase in the buyback price hedge funds would have to pay. Instead of buying the stocks back at the expected lower price, hedge funds are required to buy it back at an increased price, causing an unexpected loss.
Dittmar said there are also dangers in shorting, which can result in a “spiraling” behavior, as was the case with GameStop. “Spiraling,” Dittmar said, occurs when there is high demand for a stock while it is still being held by other investors.
When there is high demand for a certain stock with limited supply, this puts pressure on the stock price, Dittmar said.
“You can get into one of these situations like we saw with GameStop where there’s a lot of demand for the short sellers to get their hands on the stock and people holding the stock are not willing to sell or they’re pushing up the price for whatever reason, so you get this kind of spiraling behavior that we saw with GameStop,” Dittmar said.
Some even called GameStop and Reddit a movement, even comparing the situation to the 2008 Occupy Wall Street movement, which involved anti-Wall Street protesting against social and economic inequality.
Rackham student Diego Fung told the Daily last week even though he knew buying GameStop stocks was a risk, he did not want to miss out on the exciting opportunity.
“I felt like by investing, I was not just trying to make money, but I felt like I was a part of something bigger,” Fung said. “… Now we have millions of people worldwide who are investing in GameStop and these hedge funds, they have taken notice that we have all these retail investors who have this common goal and are all participating together — and it can cause the hedge funds to lose billions of dollars.”
Fung also said Wall Street Bets has given individual non-professional investors, known as retail investors, the opportunity to participate and possibly reach financial independence.
“This movement is really about giving the chance to … retail investors like me who want to invest and maybe reach financial freedom,” Fung said.
Daily Staff Reporter Isabelle Regent can be reached at email@example.com.