Can’t Stop GameStop: How $GME democratized the stock market

A storefront of the large video game retailer GameStop, whose publicly traded stock recently blew up the investment world. Source.

Stock traders from a reddit community called r/WallStreetsBets (WSB) have ignited a movement to buy and hold GameStop stock, sold under the symbol GME. The chaos inflated the value of GME more than 1,625% in January and has caused an almost $20 billion dollar loss to hedge funds. 

It all began when hedge funds — investment groups created from the combined funds of rich investors — began to “short” GameStop in early January. Shorting is a practice where a person or firm borrows stocks from a brokerage, sells it, and then buys them back at a later date to repay the brokerage. The basic concept is that the borrower is betting that a stock will fall in price, so when they buy it back at a later date to repay the lender they will pocket a profit from the original sale. Conversely, if the price of the stock rises, the borrower will still have to pay back the lender, and therefore is exposed to a loss when they buy it back at a higher price. GameStop became so heavily “shorted” that the accumulated shorts were equivalent to 140% of the existing stock, which left the short sellers extremely exposed to possible increases in GME’s price.

People posting on the anonymous high-risk investing forum r/WallStreetBets noticed that the GME stock was so heavily shorted by other investors, like hedge funds, and they started to buy the stock frantically. Historically, groups of small individual investors would not be able to cause much significant impact on the market, but the coordination and communication offered by social media created an unprecedented demand for the stock. This buying frenzy among small-time, individual investors triggered a short squeeze, in which the stock price for GME jumped to astronomical heights. The people who bet on its downfall scrambled to buy the stock in order to mitigate their losses, which puts even more pressure on the stock’s price.

As GME’s value soared, the hedge funds who bet on it to fall have lost billions while some retail investors — the non-professional common people — have made millions from GME. It is a complete role reversal: research has shown that hedge funds manipulate stock prices to increase their revenue, but now average people are able to capitalize on the risky trades of hedge funds in order to take back money from the rich. 

The GME saga of the past two weeks will have far-reaching implications: it has shown that Wall Street can no longer ignore retail investors, it has shone a light on some of the illicit practices of hedges funds which contributed to the 2008 financial crisis, but perhaps most significantly—it has gotten people interested in the stock market.

The idea that investing in a struggling video game retailer and following the advice of a vulgar subreddit can make somebody a millionaire seems ludicrous, but recent events have people interested in understanding how the stock market actually functions beyond its mystifying and abstract popular image. 

Opening up the stock market to investment from average Americans and beyond just the rich or the highly educated allows for greater capital to flow into the market — which means greater economic activity. This is especially important as the United States still struggles with the economic crisis from COVID-19: investments in the stock market might mean an opportunity for unemployed Americans to put their money to work for themselves and the nation.

Despite that, WallStreetBets’ infamous catchphrase “Stocks only go up” isn’t always accurate, and investing in the market will always bring a certain amount of risk. This is especially true for high volatility stocks like GME, and it is important for any investor to do their research before doing trades in the stock market.

Even though the GME fad will eventually fade away, this event has created a new informed generation which will view the stock market as a viable way to make money, and that will likely contribute to a further democratization of the market.