On Wednesday, January 7th, GameStop stock skyrocketed. Redditers on a subreddit called r/WallStreetBets had successfully manipulated the stock market. They did this in order to “show up the Wall Street funds that bet big money on the shares to fall”, according to the Washington Post. How did this happen, and what are the effects? To find out, we’ll have to take a deep dive into how the stock market works.
In the stock market, people buy and sell portions of a company, called shares. These shares can give the purchasers the power to tell a company’s leaders what to do. However, most of the power comes from the sheer amount of money a person can make. If a company is doing well, their shares are expensive. But if people think the company is going to fail, their shares are cheap. The only way for a person to avoid going broke on the stock market is to sell when the shares are expensive, and buy when the shares are cheap.
Let’s take the 2009 financial crisis as a metaphor. Right before the market crash, houses were very expensive. It was a great time to sell because you’d get a lot of money from it. But if you were trying to buy, you weren’t having the best time. Tons of people were looking to buy a house, so people looking to sell houses were rare. You’d have to pay a lot of money for a house. However, after the crash, property was very cheap. This was good for people trying to buy, but bad for people trying to sell.
Essentially, this is what happens (on a smaller scale) to the stock market very often. Stocks plunge and rise regularly, which is what makes having a lot of money in stocks risky. If you make one mistake and stock plunges, your shares are suddenly virtually worthless. For beginners, there isn’t much hope in the stock market. This effectively makes stocks popular with rich people, who can afford to lose a lot of money.
Gamestop stock wasn’t doing well. By January 4th, 2020, a share of Gamestop stock was worth only about $17.25. For reference, a share of Tesla stock was worth $729.77 on that same day. Millionaire investors were selling their shares, and it seemed GameStop stock would keep doing poorly for the foreseeable future. But by mass-buying tons of GameStop stock, these Redditers had made it in-demand. As a result, GameStop stock soared, which was the last thing the investors who sold their shares wanted. They had sold when the price was at a huge low, and now other investors were cashing out on the sudden surge in price.
But what are the effects of this whole event? It reminds big-stock investors that there is strength in numbers. According to NBC, this event could, “serve as a check or balance on other large forces…which are used to throwing their weight around without ordinary investors affecting a price.”