GameStop and Reddit and stocks, oh my! – An easy breakdown

The media, Wall Street and small-time investors are in a frenzy. A lot of names are being thrown around – even politicians are getting into the mix. Below, we’ve provided a breakdown of everything you need to know about the GameStop controversy.

stock market

It all started a decade ago, when the Occupy Wall Street movement created a groundswell of class consciousness. It was the 99% against hedge fund millionaires. But it wasn’t until recently that a group of mostly young and hungry day traders decided to put skin in the game and make the stock market work to their advantage. And for many the goal isn’t about riches, but social justice.

Gleaning information from the stock market, these day traders started a thread on Reddit: WallStreetBets (WSB), teaching one another how to drive up the share price of struggling companies, most notably GameStop (GME). They also targeted Macy’s (M), BlackBerry (BB), and AMC Theatres (AMC).

Why would they want to drive up the share price of struggling companies? Hedge funds and short-sellers like to speculate on which companies will have crashing stocks, and place bets against them. These are the elites of Wall Street, and millions of people rely on them to boost their stock portfolios and help them make their fortunes.

However, many Millenials, Gen Zers and others detest these hedge funders and short-sellers. For one, this group is partially responsible for creating the untenable financial system that led to the 2008 housing crisis and recession. Adding insult to injury, most of these people emerged unscathed, building on the narrative of a rigged system. Another reason WSB decided to target these hedge funders is because of questionable practices with struggling governments, like leveraging Puerto Rico’s debt in order to privatize its public utilities. The practice is crippling Puerto Rico’s local government, which is still reeling from $100 billion in damages from Hurricane Maria.

By driving up the stock price of struggling companies, hedge funders and short-sellers that bet against these stocks experience a “short-squeeze,” where they lose the bet against the company, and often have to buy the stock at elevated prices to prevent further losses. For perspective, GameStop shares have gone up 1700% since the beginning of January. One year ago, a share was priced at $4 – earlier this week it briefly surpassed $500.00.

The WSB Reddit page has over 2 million followers, and many are celebrating the windfall, paying off student loan debts, and even donating to charity.

Robinhood is a free trading app, and is largely responsible for democratizing the stock market. It allows average Americans to buy in without paying a brokerage fee. However, many became upset with both Robinhood and Ameritrade, who were restricting trades on AMC and GameStop. Robinhood confirmed that this is a standard practice to protect the stock market against volatility, and that they are closely monitoring the situation.

Alexandria Ocasio-Cortez

Alexandria Ocasio-Cortez – Photo credit: CNN

Public figures from across the political divide are weighing in on the topic, and while Alexandria Ocasio-Cortez and Donald Trump Jr. could not be further apart in ideology, they seem to be in agreement about the restrictions.

On Twitter, Donald Trump Jr. (@DonaldJTrumpJr) said, “It took less than a day for big tech, big government and the corporate media to spring into action and begin colluding to protect their hedge fund buddies on Wall Street. This is what a rigged system looks like, folks!”

Whereas a more tempered Cortez (@aoc) stated, “We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, I’d support a hearing if necessary.”

Even the world’s richest man, Elon Musk expressed disappointment when Discord removed WallStreetBets from their platform. “Even Discord has gone corpo” Musk (@elonmusk) stated on Twitter. He doubled down against hedge funders with a tweet on Thursday, “u can’t sell houses u don’t own u can’t sell cars u don’t own but u *can* sell stock u don’t own!? this is bs – shorting is a scam legal only for vestigial reasons.”

Yesterday, a class action lawsuit was filed against Robinhood, following their restrictions on GameStop’s stock. As of this morning however, Robinhood once again allowed trading on GameStop, albeit limited. This is a classic battle between youth vs. “the establishment,” and while fascinating to watch unfold, no one knows quite yet how everything is going to shake out.



DISCLAIMER: The Allen Law Firm does not provide financial advice, nor should content in this article be construed as financial advice.