The end of January saw a new fortune 500 company emerge – GameStop. Hedge funds had betted on GameStop losing value and, therefore, allowing them to short-sell their shares. However, due to a mass influx of amateur investors pushing the price up, hedge funds lost around $13billion. These investors formed on the social media website Reddit under the thread ‘WallStreetBets’, whose aim was to cause a ‘short squeeze’, deliberately pushing the price up so that hedge funds lost out.
GameStop’s shares rocketed from just over $6 a piece last year, to over $350, an incredible increase in value backed by Redditers, who call themselves ‘GameStonks’. The collective action was to cause huge losses to large hedge funds who bet against failing companies and aim to short sell.
Short-selling is when investors borrow shares from a stock knowing that the value of that share is likely to decrease. Before the price deflates, they sell the borrowed shares to other investors. Once the price declines, investors buy back those shares at a lower price than they were sold. Investors then return the borrowed shares, having made a profit.
The Reddit thread ‘WallStreetBets’ noticed that hedge funds were betting against GameStop’s shares and urged followers to buy the borrowed shares from hedge funds. Due to the mass of new investors, the share price increased. However, hedge funds had to buy their borrowed stock back, which increased stock prices further. This caused a ‘short squeeze’, meaning hedge funds made losses. This effect caused some to become bankrupt as they were forced to pay inflated prices for their borrowed stock. This mass-market manipulation by small investors was further fuelled by celebrities such as Elon Musk who, notoriously, has called out hedge funds.
GameStop’s unique position in all this is new. This level of mass organisation with no single mind behind the controlling has never been done before, especially when the motivation for speculative buying was one of collective emotion and/or rage towards hedge funds. The name given to the Redditers who invested in GameStop originates from the online phenomenon of ‘memes’. In this case, the name ‘GameStonks’ derives from the meme about ‘Stonks’, an internet term used to describe assets such as stocks and shares. Unfortunately, it is likely that GameStop’s investors are soon to feel the sting as the share price returns to its intrinsic value. This price bubble is inherently going to burst as share values are based on how well the company is doing, i.e. profits.
Redditers have moved their attention to other companies that have caught the interest of hedge funds wishing to short-sell. This is another bid to stop hedge funds profiting off of failing companies. However, experienced investors are calling for some sort of financial regulation to stop these groups pitting themselves against hedge schemes, saying that the financial market is based on the “assumption that people are trying to make money for themselves, not destroy it for other people”.