How GameStop And Other "Meme" Stocks Became The Centerpiece Of A Stock Market Frenzy

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Video game retailer GameStop has become the centerpiece of a recent stock market frenzy (Credit: Dwight Burdette/CC BY 3.0/ Wikimedia Commons)

If you have been paying any attention to the news over the past few weeks, you may have heard of the exponential rise and the equally dramatic drop in the share price of video game retailer GameStop (GME) and other "meme" stocks — those favored by millennials — like AMC Theaters. The two-week frenzy, which pitted individual amateur investors against seasoned professionals — and resulted in a Congressional inquiry— began rather innocently in an online community on Reddit.

In early January 2021, Player896, a member of Reddit's r/WallStreetBets community known for making risky market bets, submitted a post making a case for buying GME shares. The video game retailer's stock price, which had been on a steady decline since 2015, had fallen to new lows after the company reported lower-than-expected earnings in December 2020.

Player896, later identified as Keith Gill, argued that the company's recently-implemented online sales strategy was starting to work, and asserted that GME shares were significantly undervalued. His conviction was further strengthened on January 11, 2021, when GME announced that Ryan Cohen, the co-founder and former CEO of the wildly successful online pet health company Chewy, would be joining the company's board.

The steady purchase of GME shares by Reddit investors caused the price to rise more than 50 percent in just two days. Soon, retail investors countrywide — eager to make what appeared like easy money — jumped in. "In this sort of Wall Street bets culture, people take screenshots of how much money they've made or lost to kind of show off," said Ciamac Moallemi, a professor at Columbia University's business school. "And as they sort of advertised that, people started piling into the trade, and the momentum built.”

In just nine days, Gamestop’s stock rose 1800 percent to a mind-boggling $380 per share! Just as it seemed that the price had peaked, Elon Musk entered the fray. Known for his eccentricity and love of meme culture, the Tesla CEO tweeted out to his 45 million followers, “Gamestonk!!” and included a link to r/wallstreetbets. His seeming endorsement caused the GME shares to rise further to an all-time high of $483 per share!

The high stock price proved disastrous for large institutional investors who had "shorted," or bet against GME. Short-selling, a common practice amongst seasoned traders, is a complex, high-risk trading strategy. It entails borrowing a company's stock from a lender, selling it at the current price, and repurchasing it when it's time to return the loan. The strategy is based on the assumption that the company's share price will trend down, allowing the short seller to repurchase the stock at a much lower price and profit off the price difference.

However, if the stock rises, the traders are forced to buy back the shares at the higher price, resulting in large losses. This was certainly the case with two of GameStop’s largest short-sellers, Melvin Capital and Citron Research. The former experienced losses so large that it was forced to seek out a $2.75 billion bailout from another hedge fund. By January 27, 2021, both investors had closed out their short positions in GME, taking a 100 percent loss.

As seasoned traders dealt with severe losses, amateur traders celebrated their highly-valued shares, which netted them thousands and, in the case of early investors like Gill, even millions of dollars. Jaydyn Carr, a fifth-grader from San Antonio, Texas, made national news after selling his 10 GME shares, purchased for $60 in 2019, for $3,000. Invigorated by these success stories, amateur investors began to drive up the prices of 50 other heavily-shorted companies, including AMC, Blackberry, and Bed Bath and Beyond.

The stock euphoria balloon burst abruptly on January 28, 2021, when popular trading platforms like Robinhood and TD Ameritrade restricted the trading of GME and the other meme stocks to just sales. While the unprecedented measure, purportedly taken to "mitigate investor risk," caused an uproar among both customers and lawmakers, the damage had been done. As panicked individual investors rushed to offload their holdings, the stock prices dropped rapidly, resulting in sizeable monetary losses for many.

A graph shows the GME stock price volatility from January 11 to February 5, 2021 (Credit: Wkipedia.org)

Many experts argue that instead of the “David Vs. Goliath” scenario depicted by media outlets, the meme stocks frenzy serves as an educational warning to those looking to get involved in the stock market. "The question is, do these retail investors understand what they're doing? And does their outsized influence represent risk to the markets?" said Scott Galloway, a professor of marketing at the New York University Stern School of Business. "Do we have a new level of systemic risk injected into the market by individuals that appear to be more gambling, if you will, than actually investing?"

However, despite the risks, even the amateur investors who lost money do not regret their siege against Wall Street traders. “We’ve helped expose normalized exploitation of the market, and now the right people are getting involved,” quipped a Reddit user. “It was 100% worth it."

Resources: VOAnew.com, marketwatch.com, CNBC.com, ABCnews.go.com

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108 Comments
  • cuteuni
    cuteuniThursday, February 25, 2021 at 8:55 am
    Wow this is alot to rember but this can make people poor! People can be buying them every day they could get millions out of this or they could loose alot out of this! I
    • strawhat
      strawhatFriday, February 26, 2021 at 2:04 pm
      if they're buying something i don't think its gonna make them poor.
    • toe
      toeThursday, February 25, 2021 at 8:24 am
      I despise the organizers of this. This is a scheme targeting people who know very little about the stock market, telling them not to sell their stocks despite the fact that the stock was obviously going to come crashing down. People bought the stock while it was on the rise, and it crashed and those people lost tons of money. This was never about GameStop, the people on wallstreetbets aren't gamers, they just love money,
      • hehebobisbob
        hehebobisbobSunday, February 28, 2021 at 12:09 pm
        sure bud. find out about the hedge funds earning billions of dollars each year because they are betting against gamestop. all Reddit did was go, tell everybody about this, and try to stop it.
        • rlixify
          rlixifyThursday, February 25, 2021 at 6:00 pm
          I agree. Market manipulation like this should be illegal.
          • sydney_zepp
            sydney_zeppSaturday, February 27, 2021 at 1:58 pm
            Yes! Exactly!
            • serenejsmooth
              serenejsmoothFriday, February 26, 2021 at 8:35 am
              Definitly
          • qwerty123453
            qwerty123453Thursday, February 25, 2021 at 7:37 am
            my teacher owns a stock share
            • strawhat
              strawhatFriday, February 26, 2021 at 2:07 pm
              awesome, how much is it worth
              • sydney_zepp
                sydney_zeppSaturday, February 27, 2021 at 1:59 pm
                Well, the prices to up and down, so it all depends.
            • 27cwalters
              27cwaltersThursday, February 25, 2021 at 6:52 am
              Wow this a amazing
              • 27carsonjones
                27carsonjonesThursday, February 25, 2021 at 6:51 am
                Game stop is my life Lol
                • 27carsonjones
                  27carsonjonesThursday, February 25, 2021 at 6:49 am
                  Game stop is my life
                  • rei_ayanami
                    rei_ayanamiThursday, February 25, 2021 at 6:39 am
                    Its honestly so funny that people are upset. Wall streeters have been doing this stuff for years and when non rich people actually get money they get upset.
                    • eventperson7
                      eventperson7Friday, February 26, 2021 at 8:13 am
                      Actually, no. Wall streeters have bet against GameStop, and these stock-buyers artificially inflated the stock. This caused the wall streeters to lose money. How do the Wall streeters lose so much money? They borrow the money that a share is worth now. They pay back the amount of money that it becomes worth later. So they would want the stock to go down. Since people bought so much stock, the price rose dramatically, causing the wall streeters to have to pay a large price.
                      • rei_ayanami
                        rei_ayanamiMonday, March 1, 2021 at 6:16 am
                        Exactly. Wall Street people have always been doing this type of stuff. They told people to invest to get money, but when they actually invest, they get upset since now they are the ones that have to pay.
                      • addyjane
                        addyjaneThursday, February 25, 2021 at 8:24 am
                        many rich people actually lost money instead, which is mainly the reason people are mad.
                        • strawhat
                          strawhatFriday, February 26, 2021 at 2:20 pm
                          its called stocks for a reason you either lose or get money depends on how the business is going
                      • fairylala
                        fairylalaThursday, February 25, 2021 at 4:15 am
                        It’s a very surprising new!😬😬😬
                        • animal_crossing
                          animal_crossingWednesday, February 24, 2021 at 2:25 pm
                          If you did, you must be a millionaire!
                          • animal_crossing
                            animal_crossingWednesday, February 24, 2021 at 2:24 pm
                            Who brought Gamestops stock?