By: Giovanni Culotta
On January 11, the stock price of GameStop was $19.94, not much of a change from the beginning of the year. That all changed about two weeks later on January 27 when GameStop’s stock price skyrocketed to over $300/share, thanks to mass purchases of the stock by Reddit investors. The market was sent into a frenzy, and a spur of controversy resulted in the days and weeks following the surge. So, how did this happen? I’ll do my best to uncover how this whole bonanza came to be.
In the stock market world, there are two types of investors: institutional and retail. Some of the most talked about institutional investors are hedge fund managers, who make big bets for the chance of making big returns. Retail investors are considered “main street” investors, like you and I. Because GameStop is a struggling business, its per-share price was considered overvalued. Many hedge fund managers sold its stock short.
“Short selling” occurs when investors borrow and subsequently sell shares of a stock that they do not own. Essentially, investors are betting that the price of shares sold short will fall. They are anticipating that other GameStop investors will lose faith in their investment and eventually sell their shares, pushing the stock price lower. However, short selling is risky, and if the stock price were to dramatically rise, it could result in massive losses for investors. Enter the Reddit investors.
The mass-buying of GameStop stock began shortly after the market opened on January 27, when Reddit users figured that hedge funds were massively short on shares of GameStop. It was reported by Forbes that over 140% of outstanding shares were sold short, more than any other stock. In other words, if short sellers were forced to buy back shares, there would not be enough shares to cover the outstanding shorts.
To prevent drastic losses, hedge funds had to buy it back immediately. Anticipating hedge funds’ desperation to buy back, Reddit users encouraged existing shareholders of GameStop stock to hold their shares and sell them at significantly higher prices than normal. This is where the “TO THE MOON” saying came from. Shareholders were selling to hedge funds for prices upwards of $300 and even $400, which shot the price up even higher and made many Reddit users a massive windfall profit. The Reddit users “short squeezed” the hedge funds in a classic David vs Goliath story. When all was said and done, the stock price was as high as $483.00 per share, good for a 680% increase in value in the month of January, per Yahoo! Finance.
One of the many controversies surrounding the stock surge was that the brokerage firm Robinhood, which caters to retail investors, prevented their customers from trading GameStop while much of the volatile price moves were unfolding. This was interpreted as helping hedge funds, by limiting the buying pressure on GameStop shares. As expected, this move received major backlash from retail investors and even politicians, such as New York congresswoman Alexandria Ocasio-Cortez. AOC slammed Robinhood for aiding the hedge funds, and not giving the same opportunities to retail investors, who simply beat Wall Street investors at their own game.