Reddit Financial Revolution

In late January, a financial revolution led by subreddit w/WallStreetBets made the highly improbable a reality. A union of millennial Reddit users collectively bought dying GameStop stocks in an attempt to interfere with Wall Street hedge funds. By the end of the month, investors saw GameStop stock price rise more than 180 percent. 

r/WallStreetBets subreddit profile picture|Photo courtesy of Medium

Buying a stock in a company is basically placing a bet; investors are betting on an increase in stock value as a result of good business events such as the release of a new product or a good quarterly report. Alternatively, investors can also bet against a company by “short selling.” To “short” a stock is to borrow some shares in a company then sell them in the hopes that you can later buy back the same number of shares for a lower price. If the price of the stocks actually go down, when investors give the shares back to the lender by an agreed-upon time, they would be able to pocket the difference in how much they initially bought them compared to how much they returned them for.

Short selling is typically done with dying companies; companies like GameStop. With the rise of downloadable video games and the decline of retail consumerism, GameStop, which sells physical consoles and video games, has been on a financial decline since the late 2010s. The video game distributor has been able to float on water partly due to its business in used games, offering a cheap alternative to online purchasing for those willing to make the trip to the store, and their supply of in-demand consoles like the PlayStation 5 and Xbox series. However, used games and popular consoles can only hold so much weight, as GameStop, according to its stock trends, is on its last leg with its end days fast approaching. 

This visible decline made GameStop the perfect target for short-sellers. However, great rewards come at great risks. Shorting a stock, due to its uncertainty, is a risky tactic often left to experienced investors. When one simply buys a stock, the only money they can lose is how much they initially put into the company. If one invested 100 dollars into Ikea, for example,  and the stock plummets to 10 dollars, then they would only lose the difference (100 minus 10, or 90 dollars). There is a cap to how much investors lose when they invest. 

Graphical depiction of a short squeeze|Photo courtesy of CenterPoint Securities

Short selling, on the other hand, theoretically has no cap to how much one can lose as there is no cap on how much a company can be worth. If one shorted Ikea 100 dollars, then suddenly the company produces the most desirable doorknobs that the entire world feels they must have, resulting in a stock increase of 1000 dollars, the short seller would lose the difference when buying back their stock to return to the lender (1000 minus 100, or 900 dollars). 

However, such a loss does not typically happen to short-sellers, as they usually successfully predict the demise of a company, and alternatively have the ability to pull out before the stock rises to more than they initially put in. If the company they are shorting skyrockets in value, they can buy back the shares at a slightly higher price rather than risk a bigger loss.

But, as in the case of GameStop, when large numbers of people are shorting a particular stock that suddenly takes off, this phenomenon can trigger something called a “short squeeze.” This is when short sellers realize the competition and collectively rush to buy up more shares to return to their lenders. This leads to a classic case of supply and demand; high demand and low supply further increase the price, causing more short sellers to buy back their shares. Short squeezing is exactly what short-sellers do not want, as initial investors who owned the stock before the squeeze are the only ones that benefit. 

Gamestop stock increase|Photo courtesy of Business Insider

When users under the subreddit r/WallStreetBets noticed that GameStop’s shares were being shorted by huge amounts of established and wealthy Wall Street investors, they decided to try to build a movement of Redditors that would buy up large amounts of GameStop stock, increasing its value enough to trigger a short squeeze. The Redditors were successful in their endeavors, as they gathered enough people and momentum to completely skyrocket GameStop stocks. Amateur Reddit investors gathered their new riches as they watched the top dog Wall Street players reap their losses. 

Robbinhood was the app Redditors used to buy their stocks|Photo Courtesy of Newsweek

Due to the enormity and consequential calamity of the event, there is a federal investigation underway in an attempt to reveal whether or not what had happened was an illegal form of market manipulation. According to Market Insider, the House Financial Services Committee has scheduled a hearing on February 18 on the matter. Rep. Maxine Waters of California said she wanted representatives from GameStop and Robinhood to testify along with Keith Gill, a Reddit user who allegedly made millions off the GameStop rally to be present at the trial.

Normal people with normal paychecks were able to unionize and do something so improbable that it was unaccounted for by Wall Street. With class disparities and income inequality on the rise, many were overjoyed at the sight of relatable figures beating the top one percent at their own game. r/Wallstreetbets gave American citizens a much needed Robin Hood-esq show of a successful rise of the underdogs. 

Written by Roaa Alkhawaja

Co-Editor in Chief and Senior, Ro'aa Alkhawaja, loves herself a good week of reading, baking, tea-drinking, and eating more Nutella sandwiches than should be humanly possible.

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