The Reddit group, WallStreetBets, took over the stock market this past month and wreaked havoc across the world. They influenced millions of people to buy shares of certain companies so that the price of each share would go up, and their hopes came true. GameStop, Nokia, Blackberry, and a few others saw a tremendous increase in the price of their stock. GameStop itself went up over 1000 percent within just a couple of days, which allowed a cascade of Robinhood investors to net significant incomes while an unlucky few bought at the peak and saw red flashing in their bank accounts.
When the frenzy commenced, GameStop was sitting at around only a meager $40. Hedge funds such as Melvin Capital had shorted the stock, believing that its price would plunge, and consequently lost huge sums of money when it skyrocketed to a high of $450. What Robinhood and hedge fund investors alike did not expect was that the stock would plunge yet again, back to a current level of around $100. Other companies such as Nokia and Blackberry saw an increase of share price of over 200 percent!
To stop Gamestop from continuing to rise in price, Robinhood posed restrictions on them by only allowing you to buy a certain amount of stock which meant they couldn’t purchase as many as they wanted to. Now while some people are advocating that what Robinhood and others did was wrong by not allowing to purchase more shares, which caused the price to go down, the recent event is a textbook example of a “pump-and-dump” scheme. A “pump-and-dump” is when a horde of investors collectively boost the price of a stock through purchasing tons of shares, which causes the price to go up even though there is little financial reasoning to support this. Once the stock reaches a high price point, these investors then sell their positions for a hefty profit.
GameStop is an example of this financial trickery because the company itself is making no money from these volatile exchanges and has had many of its own stores shut down over the past several months during the pandemic, which shows that they are on the verge of bankruptcy as a corporation. Despite this weak financial standing, investors inundated the market with “GameStock” purchases and thus inflated the stock price, which caused those on the bullish side of the market to make a significant profit and many with a bearish and more realistic outlook to lose, including the hedge fund investors mentioned previously. Many people refer to this occasion as a “Short Squeeze.” A short squeeze occurs when a stock or other asset jumps sharply in price, forcing traders who had bet that its price would fall to buy it in order to forestall even greater losses. Their attempt to buy only adds to the upward pressure on the stock’s price, thereby adding fuel to the fire.
While some have argued that the wealthy have been committing these questionable tactics for years, the difference with regard to GameStop is that these investors have no solid rationale behind their actions, while in the past other examples of this “Short Squeeze” phenomenon did. This case has even been displayed to those in Congress and they have had a hearing about it. A saying that has been circling around sites like Reddit, Discord, and even social media sites like TikTok, “GameStop to the Moon.”