How Reddit Disrupted the Stock Market

Mark Rokhlenko, Editor In Chief

Disclaimer: This article was written on February 4th, making some of the information out of date.


It shocked many when last week, it was announced that Gamestop stock prices had multiplied by obscene amounts. Though we do have a chaotic world now, with events happening that I never would have imagined happening, the last thing I would have predicted was for Gamestop to become an extremely valued company overnight. So what happened? Here, we’ll explain what occurred in this event and then interview one of the investors of Gamestop in a later article. 


First, we need to cover some basic ground. Reddit is an online forum platform, which houses a community of 2.2 million people on the subreddit r/WallStreetBets(WSB). The subreddit is a community of individual stock market investors that analyze and look closely at the Stock Market. Until recently, they were mostly a forum of edgy memes and confusing phrases.


Now, let’s look at a rough explanation of how the Stock Market works. Now, I’m no expert in the Stock Market, but stay with me. Specifically, we need to understand what shorting is. In essence, shorting means that you are betting on a company to fail. To use an example from TLDR News, using apples as a metaphor for an item in the stock market. Imagine that you think that the stock price in apples will go down(the apples will become less valuable). If apples are valued at $1 but you think their price will drop, you might go to a retailer of apples, buy a few apples and promise to pay the retailer back the stock price of those apples later, with some interest. Then, you sell that apple to someone else for $1 and wait for the price to drop. If then, the price drops to 50¢, you can buy 2 apples for the same dollar you sold the first apple. You then go back to the retailer you originally bought the apples from and give them 1 stock price of apples, which is now 50¢, meaning you bought $1 from them, but only actually paid 50¢. Replace apples with stocks and there it is: Shorting.


We’ve got the basics covered, let’s get into the story of the day. Gamestop is a company that sells video games physically, like in malls, and does not have an online presence. Due to the coronavirus, Gamestop Stock Prices went down drastically, and big investors tried to seize a situation. Big companies and hedge funds thought that the company would go bankrupt, and thus began the process of Shorting Gamestop stock. They weren’t sure, but they were gambling that Gamestop was going bust, and it was now in their best interest for it to go that way. 


However to the surprise of the big guys, Gamestop had some things go smoothly for them. A few billionaires invested in Gamestop, and the PS5 Gaming Console was released, making sales go up. So good business news, but overall, Gamestop stocks were still going down. Well, the companies betting on Gamestop to fail now had so much of their previous stocks Shorted that they couldn’t afford for Gamestop to go up, so they gambled again, and doubled down, turning even more stock into Shorted Stock. They aggressively targeted a company for their business deals to go out all right. 


Remember r/WallStreetBets? Well, they took notice of what was going on. They realised that if they bought stock from Gamestop and then didn’t sell it to big companies to Short Gamestop Stock Prices, the Stock Price would actually go up. This is when we saw that huge spike. Gamestop price skyrocketed because so much stock was already trading hands, the stock that stopped trading caused a financial boom.


In a financial viewpoint, the outcome was small, casual investors from reddit making a lot of money while big companies and hedge funds lost billions of dollars. One of those that stand out is Melvin Capital, a big hedge fund. Melvin Capital betted on Gamestop crashing, but it didn’t end well for them. The Hedge Fund quite nearly collapsed and had to be bailed out by a different company.


The big-picture outcome of this? Well, that’s yet to be understood. Many of the big companies are claiming manipulation of the market and for greater regulations. Others are saying that all this is is a free market economy, where the people decide what is at value. Although, it’s not like the Stock Market was fair before. What many people logicly say is happening is that big Hedge Funds like Melvin Capital have been “manipulating” the markets for years now, but know that they realise that the normal Joe can do it as well, they are screaming to get their elitist benefits back. Anyway, there is no clear evidence that WSB actually manipulated anything. Though this investment surge was based on speculation, it was reasonably good investing, as the Gamestop was probably more Shorted than it needed to be. All this was was the people getting what they wanted, instead of the Big Guys.


I am not an economics expert, but this story unraveled and showed that the little guy can indeed win. We are yet to see the full consequences of these actions, but you would be remiss to think that this will be the last time normal people show their power.