How surprising stock values make a market
From the beginning of this global pandemic, many companies, including GameStop, suffered economic losses.
Quarantine rules and increase in online shopping caused hundreds of Gamestops to close down. This also caused their market value to decrease, so Wall Street traders took advantage of this incident by shorting these companies’ stocks.
Traders would borrow the company stocks, immediately sell them and wait till the company’s value decreased to buy their stock again in order to return it back.
“Borrowing shares and sell them in the hopes that the stock price drops, business goes bankrupt/fails, etc. so that you can buy them back at a lower price,” said Riverside economics teacher David Norman in an email to The Pirates’ Hook.
This stock trick is commonly known to be used when a company is going out of business.
“This can harm a company because as the news of the shorts gets out (often selfishly publicized by large short position holders), people and institutions who hold the stock may get concerned and sell some of their shares, thereby increasing the downward pressure on a stock,” said Norman
When a Reddit group named r/wallstreetbets found out what Wall Street was up to, the over eight million members who are known for their good stock marketing wins but mostly big losses, they thought it would be funny to increase these failing companies’ value.
“Unfortunately, many of the “meme” stocks pumped by Reddit are teaching the wrong method to harnessing the power of the stock market,” said Norman. “Trading” is a zero sum game, and the individual investor almost always loses in the long run.”
Wallstreetbets members started buying thousands of shares of companies such as Gamestop, AMC, Nokia and even BlockBuster in order to make these stock traders lose their shorting trade value.
“Individual investors in the aggregate were simply trying to ‘short squeeze’ the institutions and big fish,” said Norman. “While the squeeze ‘worked’ in the short run, it doesn’t change the material value of the underlying company in the first place.”
The group made a huge impact, making Gamestop’s stock value jump from $19.94 USD on January 11 up to $347.51 by January 27. The purpose of this movement was intentionally to hold these stocks in order to teach a lesson to the Wall Street traders on not to take advantage of dying companies, but many already started to see this as a way to make money.
“Redditors are not interested in saving these companies,” said Norman. “Their stated goal is to stick it to Wall Street with their “diamond hands.” The whales (hedgefunds, quants, professional traders) mostly took advantage and ended up making most of the money during this anomaly.”
GameStop’s stock is now back down to $184, but it won’t be the last time investors pull surprising and controversial moves.
“Taking a side on this narrative is what makes a market,” said Norman.