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Why GameStop’s stock soared, and why it’s causing a fight between Reddit and Wall Street

Reddit and Wall Street are at odds because of GameStop. Here’s why

In this Oct. 15, 2020 file photo, a woman wears a face mask as she walks past a GameStop store in Des Plaines, Ill.
In this Oct. 15, 2020, file photo, a woman wears a face mask as she walks past a GameStop store in Des Plaines, Ill.
Associated Press

You’ve probably seen headlines about GameStop’s rising stock prices. And you’ve probably seen hints about how Reddit helped it happen. Indeed, Reddit helped GameStop’s stock numbers soar in recent days.

Here’s how it happened

Traders on the Reddit page WallStreetBets, a community known for discussing market trends, recently pushed for people to buy GameStop options, hoping to raise the stock price of the video game company. And it’s not because there’s any new video game to be hyped about. It’s literally just to raise the company’s stock price.

So what happened next? The New York Times explains:

“The frenzy has forced market makers who sold the options to buy the underlying shares to hedge their risk. As more traders snap up options, the brokers have to buy up more shares.”

So what does that mean? Basically, people want to short sell the GameStop stock — selling it high and then buying it back at a low price. But, the company’s stock — which started at $19 at the beginning of 2021 — jumped to $230, according to The New York Times.

The problem for Wall Street?

As BuzzFeed News explains, Wall Street hedge funds had shorted the GameStop stock, which means “they had bet against it and needed it to drop in price in order for their investments to be successful.”

  • This is because of short-selling stock, a practice where you buy the stock high, sell high and then buy back later at a lower rate.
  • Or, as InvestorPedia puts it, “Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money.

Why it matters

“The moment has also been a chance for young investors — many of whom have flocked to investing since the pandemic was declared, causing the stock market to jump, helped in part by free brokerage apps such as Robinhood” to strike back at Wall Street firms, according to BuzzFeed News.

  • “What I think is happening is that you guys are making such an impact that these fat cats are worried that they have to get up and put in work to earn a living,” wrote one of the WSB subreddit moderators in a post on Sunday. “That fuzzy sensation you are feeling is called RESPECT and it is well earned. Wall Street no longer dismisses your presence anymore.”

Peter Heilbron, the founder of wealth management company Trace Wealth Advisors, said in a blog post this shows the stock market is all based on human emotions, too.

“All of this is just raw human emotion masquerading around as something more profound,” wrote Heilbron. “Everyone wants to be invited to the party but no one wants to be the one left without a chair when the music stops playing … the friction that exists between those two things is what creates volatility.”

So what next?

Reddit traders see the endgame for the stock’s success in sight. Discussions are already suggesting selling the stock options since the endgame might be around the corner.