Picture credit: The New York Times
Last month, a struggling company named GameStop made headlines because of its skyrocketing stock price. GameStop’s stock price at the beginning of 2021 was $18.84. Later, on January 28th, the stock price shot up to $483 at one point in the day, the highest it had ever been. Then the stock price dropped to around $40 in February and this past week, rose again to around $130.
So, what caused these major changes in stock price? There was no change in its products, business plans, or sales, which is usually how a company’s stock price moves. The cause was a battle between two groups: amateur investors versus sophisticated Wall Street investors.
Wall Street did not believe GameStop was a good investment and therefore bet against their stock. Then amateur investors, many of whom were part of a social media chat forum called WallStreetBets, decided to support and buy a lot of GameStop stock which caused the stock price to go up. This was a problem for Wall Street hedge funds because they had “shorted” GameStop stock. A short seller is someone who thinks a company’s stock is lower than its value and therefore, decides to sell the stock high and then later buy it back when the stock price has dropped.
However, as the stock price of GameStop kept rising throughout the month of January, Wall Street hedge funds lost billions of dollars because their bets turned out wrong. On the other hand, the everyday investors were gaining a lot of money on GameStop stock as the price went up and they started taunting Wall Street on social media, even shaming them for betting against a struggling company and trying to make money off it.
In the last couple months, many people lost a lot of money while other people made a lot of money. There are many lawsuits that have been filed by people who lost money. At the end of the day, there was a lot of confidence lost in the stock market, which looked more like gambling based on emotion rather than rational decisions.