The power of online community: GameStop’s stock market exploded, Wall Street investors at huge loss

And here’s a recap of what happened. 

In September 2019, GameStop – an American video game, consumer electronics, and gaming merchandise retailer, reported a major loss in profit.  The brick-and-mortar company had been struggling to grow sales due to the rise of e-commerce sites such as Amazon (the world’s largest and most powerful online retailer that maintains its aggressive push in low prices and faster shipping). A year prior to this according to the CNBC, GameStop said its net loss widened to $415.3 million, or $4.15 a share, from a loss of $24.9 million, or 24 cents a share. 

The situation was exacerbated when coronavirus hit. GameStop suffered even more due to the decrease in foot traffic and planned to close 450 stores this year. Yet GameStop shares became one of the hottest stocks over the course of days. How come? This could not have occurred without social media. 

Since there was no recent financial good news from the company, the professional investors at Wall Street used a trading technique called ‘short-selling’ to manipulate the price and pocket the difference.

Short-selling is a risky way to profit from declining stock prices. When you short a stock you expect the price to go down. Shorting a stock is the inverse of buying a stock. You borrow a stock, sell them and when the stock price goes down, you buy it back, return to the lenders and make a profit of the difference. Short selling is only for advanced traders as your loss is unlimited when you short. 

They sold these shorted stocks in hope that the stock price will go down. To their surprise, an army of small traders from a Reddit group called ‘r/WallStreetBets’ happily took these shares off their hands, bought into all the stock last week and are still refusing to sell them. The price in turn has been pumped up by 1700%. Wall Street guys will have no other choice than to buy from them at a very high price in order to return what they borrowed. This is a battle between little-guy investors versus hedge funds and wall street firms. 

How times have changed when smaller investors come together and turn the table around. The big guys are getting the shorter (no puns intended) end of the stick, stuck in a high-stakes gambling table with potentially infinite loss. The ball now is in the little guy’s court. The longer the folks at r/WallStreetBets hold onto their GameStop shares, the higher the price goes. Alone a small investor is only an insignificant drop in the ocean. They know they’re not going to win it against the big guys – they never do. But as a collective of over 2 million people in the Reddit group, they challenged these investment bankers and hedge funds head on. 

This whole thing makes us ponder over the power of social media groups and platforms in creating changes or disruptions in our society depending on which side of the coin you sit on. In the end, while some people would make a lot of money and others like Melvin Capital and Citron Research (the short sellers) would lose big, the stock would have to return to a true reflection of the company’s real worth. But what happened with GameStop sh