Stock market news is usually full of doom and gloom - salacious revelations of scandals
and fraud, horror stories of big bets gone wrong, laments about the fat cats of Wall
Street winning at the expense of the little guys.
But, in January 2021, the biggest story on Wall Street was a David and Goliath tale of
the little guys sticking it to the man.
A small group of independent online investors took a struggling company - a known ‘loser’
and one of the most bet-against stocks on the market - and launched one of the most
epic stock climbs in market history.
GameStop shares climbed 1700% in just a few weeks, throwing the market into chaos and
even disrupting trading as some of the world’s mightiest investment funds lost billions and
teetered on the brink of collapse.
Why did this group of vigilante investors decide to take on the giants of Wall Street,
and how exactly did they do it?
Is GameStop really breaking the stock market!?
The stock market operates on the principles of supply and demand.
Take the new PS5, for example.
At the moment, demand for the long-awaited new console is sky high, but it’s nearly
impossible to find a PS5 anywhere.
As long as the supply struggles to keep up with the high demand, the price of a PS5 will
remain high.
Demand for the old PS4s, meanwhile, has basically disappeared overnight, causing the price of
the older console to drop dramatically.
The stock market works in the same way - the more in-demand a company’s stock is, the
higher price investors will pay per share.
Investors are also not powerless against the whims of the market - investors’ buying
and selling behavior has a very real impact on market prices by signaling how strong the
demand is for a particular stock or industry.
If the latest hot stock tip sends a tidal wave of people rushing to buy, say, Apple
shares, then the price of Apple shares will go up.
Conversely, if, as was the case during the 2008 financial crash, panicked investors rush
to sell their shares and pull their money out of the market, then the market will register
this drop in demand and prices will fall to match.
When it comes to investing, size matters, too.
Bigger investors will always have more sway over the stock market as a whole because of
the huge volume of cash they have to play with.
Big players like the major banks, huge pension funds, mutual funds, and especially the exclusive
and risk-happy hedge funds have long dominated Wall Street.
These huge funds pool together the money of many individual investors, giving them the
ability to use more complex financial instruments and to take much bigger risks with their huge
pools of capital.
With this amount of money at play, each transaction made by these supersized funds has an outsized
impact on the market as a whole.
The 2008 crash, for example, was the result of a few big players taking a huge risk with
vast sums of money.
When the investment collapsed, it brought down the entire market in the process - and
it was the little guys who ultimately paid the price.
Everyday investors lost their homes, their pensions and their life savings while the
banks got billions in government bailouts.
Compared to the power these giants have to shape the market, individual investors have
historically been considered irrelevant to the stock market - and that’s largely been
true...until now.
Recent technological advances have led to the democratization of investing, and opened
up the market to a new generation of small retail investors.
With the rise of low fee, online trading platforms like Robin Hood, individual investors no longer
have to pay an analyst to manage their investments for them.
Now, retail investors can DIY their own portfolios, while turning to the power of the internet
to learn all about investing, to connect with like-minded investors, and, in some cases,
even to mobilize a small army of investors to take the fight directly to Wall Street.
There’s no denying that the rise of the retail investor has played a huge role in
this David and Goliath saga.
When the saga first began, GameStop was a failing company, struggling as the gaming
industry moved increasingly online and gamers no longer looked to bricks-and-mortar stores.
GameStop stock was a known loser, and for this reason, it had become one of the most
bet-against stocks on the market.
Major hedge funds like Melvin Capital and Citron Research were just a few of the many
that had taken large short positions on GameStop stock, hoping to cash in on the company’s
inevitable failure.
Successful investing basically comes down to buying low and selling high.
Short-selling capitalizes on this same principle, but with a twist - instead of buying the shares
outright and holding them until the price goes up, short-sellers are betting on a stock
without actually having to own it.
In fact, they are betting that the stock will fail and that the price will fall.
Short-sellers borrow shares now and immediately sell them at a high price, hoping that the
price will drop before they actually have to buy the shares to repay the loan.
Short-selling is a favorite of strategy of the big players on Wall Street, especially
the exclusive hedge funds that cater to the ultra rich.
Short-selling is also an incredibly risky strategy.
When it pays off, it pays off big - but when a short position fails, it fails spectacularly.
For those of us without an economics degree, Reddit has our backs here too.
A post on Wall Street Bets provided a very colourful analogy that is helpful in understanding
short-selling.
Let’s say there is a Monkey who hates bananas, so he bets against them, thinking the value
of bananas will go down.
Seeing this, a Gorilla tells all of his gorilla friends to buy up all of the bananas they
can find, which drives up the price of bananas.
Now Monkey, having bet against bananas, is in a tough spot.
Either he has to risk losing even more money if the price of bananas continues to climb,
or he has to buy the bananas now at the higher price, further driving up the price of bananas
in the process.
It’s a lose-lose situation for the Monkey - or, in this case, Wall Street.
Shorting failing stocks was not a new concept - major funds had been making risky bets against
failing stocks for decades before GameStop became the latest darling of the short selling
crowd.
It’s not clear why this particular stock attracted the attention of internet investing
vigilantes - perhaps nostalgia for bricks-and-mortar stores, an affinity for video games, or just
loyalty to the little guy - but what is clear is that the members of the Wall Street Bets
board on Reddit have long held a burning grudge against short sellers, and they were eager
for an opportunity to exact their revenge on the Wall Street crooks they blamed for
setting up the “house of cards” financial system that led to the 2008 global financial
collapse.
Harnessing the power of the internet, Redditors on Wall Street Bets started encouraging each
other to buy up shares of GameStop.
“To the Moon!” was both their rallying cry, and their explicit goal - they envisioned
a coordinated effort on the part of small investors that would drive GameStop’s share
price up, and, in the process, foil the short-sellers who had bet big money on the company failing.
The actions of this small group of individual investors did indeed cause GameStops’s stock
price to begin to rise.
Some of the early rise was legitimate - GameStop shares did seem to be undervalued, especially
as the pandemic boosted video game sales.
And, in early January, GameStop also announced the appointment of 3 new board members, including
Chewy co-founder Ryan Cohen, who would bring a wealth of digital experience to the struggling
company.
On the day of the announcement GameStop stock rose 13%, a completely normal reaction to
the news.
But from that day on, nothing about GameStop’s rise would be normal.
2 days later, the stock rose a shocking 57%, then another 27% later that week.
The following week saw gains of 10% on 2 separate days, then an astonishing gain of 51%.
The next week the stock kept climbing, growing 18% one day, then 93% the next day, and then
more than doubling by the end of the week.
By the end of January, GameStop shares had skyrocketed a staggering 1700% in just a few
weeks, and shares that had cost just $4 a year ago were now valued at more than $200.
What had happened to account for this astounding rise?
In short, GameStop had become a movement.
GameStop was about more than just making money - it was about taking down ‘the man’ and
punishing short-sellers.
The movement took off, and even led to the coining of a new term - ‘meme stock’.
It attracted a huge amount of media attention thanks to the ‘Trump vacuum’, and membership
in the Reddit group Wall Street Bets exploded from less than 2 million to more than 6 million
members in a matter of days.
The movement also gained some famous supporters.
Elon Musk, known to hate short-selling, tweeted: “Get Shorty”.
Politician Alexandria Ocasio-Cortez praised the movement, saying: “...everyday people
were finally able to proactively organize and get back at the folks that have historically
had all the marbles on Wall Street and forced one hedge fund into an existential crisis.”
Famous tech investor Chamath Palihapitiya got into the mix, too, investing his own money
in GameStop and vowing to donate the profits to charity.
He defended the retail investing phenomenon, warning that: "Instead of having 'idea dinners'
or quiet whispered conversations amongst hedge funds in the Hamptons, these kids have the
courage to do it transparently in a forum.
What it proves is this retail investor phenomenon is here to stay."
As GameStop’s stock price continued to climb, the Wall Street giants who had shorted the
stock were starting to sweat.
They were in trouble - as the price of the GameStop shares that they had bet against
climbed, their losses continued to mount.
Funds were forced to hedge their short positions, backed into buying up shares at the current
price, which was much higher than the price that they had already sold the borrowed shares
for.
As the major funds joined the fray and started buying up GameStop shares to repay their loans,
they helped further drive up the price and compound their own losses, which quickly climbed
into the tens of billions.
This, more than anything else, was the ultimate goal of the small group of investors who started
this movement.
One of the Wall Street Bets moderators summed it up perfectly when they posted: "That fuzzy
sensation you are feeling is called RESPECT and it is well earned.
Wall Street no longer dismisses your presence anymore."
As the losses mounted to nearly $70 billion dollars for the Wall Street Giants, it appeared
that David had successfully beaten Goliath in this round.
But what will the long-term impacts be?
Did GameStop really break the stock market?
GameStop shares are essentially still a bubble.
The stock may have been undervalued to start with, but there’s no way it can realistically
sustain the current surge in value.
The price will keep rising on a tide of investor enthusiasm until it can’t rise any more,
and then the bubble will burst.
But at least this time, it won’t be only the little guys who will pay when it does.
GameStop is significant because it proves that individual retail investors do in fact
have power in the market.
The trend of the democratization of investing is here to stay, and the investor landscape
will never be the same again.
Veteran Wall Street bigwig Tiger Williams explained it best when he said: “Retail
investors used to always be wrong.
Not any more.
Now you got 50 million of them all tied together and they really matter.”
The big boys of Wall Street will have to remember this lesson.
They’ll also have to be aware of contagion risk.
Now that the world knows what’s possible when a small group of individual investors
work together, we’re likely to see more of what happened with GameStop - in fact,
we already have.
Reddit is one again humming with activity, and the Wall Street Bets group is behind efforts
to manipulate the price of shares in companies like Macy’s, BlackBerry, and AMC, a struggling
theatre chain that’s been hit hard by the pandemic.
After the hashtag #saveAMC trended on Twitter, the stock surged 200%.
We definitely haven’t seen the end of these types of campaigns.
The situation also exposed some major flaws in our current trading systems.
For one thing, the flurry of unusual activity around GameStop triggered halts on trading
across many platforms.
These automatic halts are designed to protect against volatility, or uncertainty, which
scares investors and is bad for the market.
But now, platforms are facing backlash for locking out small investors and being accused
of effectively protecting the big buys.
Online platform Robin Hood, a long-time favorite of independent investors with the ironic motto
of “Let the people trade!”, is now facing multiple lawsuits for limiting trading on
GameStop.
The Securities and Exchange Commission and the White House are both closely monitoring
the situation, and the SEC is promising to take steps to prevent market manipulation
- but at this point, it’s unclear whether they are talking about the short-sellers betting
against the market, or the Redditors who banded together to thwart them.
Did GameStop break the stock market?
Well, it may not be broken, but it certainly won’t ever be the same.
Reddit is changing Wall Street just like Facebook has changed elections, and thanks to the democratization
of investing, the power of everyday investors is only going to increase and continue to
change Wall Street in the years to come.
If you thought this video was fascinating, be sure and check out our other videos, like
this one called “What If The Stock Market Crashed Tomorrow?”, or, perhaps you’ll
like this other video instead.
As always, thanks for watching, and don’t forget to like, share and subscribe!
See you next time!