A WORD FROM THE AUTHOR: This week I spent hours on the phone, explaining the current GameStop (GME) situation to friends and family. This is a pivotal moment for what it means to be a retail investor and there will be large legal implications within the upcoming weeks. You may be exhausted from this news but here’s my take as we head into the new week.
I’m proud to announce a new look and feel to the blog today. Notice new logos and patterns across the publication. I teamed up with graphic designer, Sherlock Chang, to bring a more visual experience to the blog.
I am not a financial advisor. While I encourage everyone to set up their financial foundations, it’s easy to get carried away with opportunities that make you money instantly. I just like stocks.
r/wallstreetbets Background
Imagine a place where high-stakes gambling and Russian roulette combined into a single place on the Internet. This high risk and high reward situation would be the epitome of r/wallstreetbets on Reddit.
Wallstreetbets is a community subreddit filled with people who based their lives on The Big Short or The Wolf of Wall Street. The goal? Make as much money as possible at no matter the cost. In a single trading day, you could become royalty or a pauper. People have become millionaires or lost their entire savings based on the advice in this subreddit.
Founded in 2012, the subreddit has become the poster child of the capabilities of Reddit. r/wallstreetbets has currently amassed 2.5 million followers, breaking the million mark last March 2020. This exponential growth has led to an increased amount of options trading (more on this in a bit) on Robinhood. It’s easier than ever to rally the troops and collectively buy/sell stock thanks to the Internet.
Imagine if 2.5 million people were compelled to buy a specific stock. This would cause massive price fluctuations. Now the scene is set.
Shorting and Trading Options
You know how your parents told you to hold stocks in an account and withdraw when you turn 65? That’s not an option for these folks. It’s a get rich or die trying kind of world for them.
One way to quickly make money off price fluctuations is to trade options. To put this into the simplest terms possible, you’re placing a bet on whether the stock will increase or decrease in share price within an allotted amount of time. There are plenty of other variables so PLEASE do your research on shares/calls/puts/the greeks when it comes to trading options. When trading options, expect to lose 100% of your money.
We can get into trading options specifics at a later date but I’m bringing this up now to educate you that there are ways of making money outside of passive investing. By placing these bets on a stock’s decline, you are “shorting” the stock.
Enter GameStop
Earlier this month, GameStop got a new look to their Executive Board. Ryan Cohen, Chewy’s Ex-CEO, joined the gaming crew which caught public attention. GameStop has been hemorrhaging from years of business decline due to the online video game space. Even with a new captain at the helm, many institutional bigwig investors placed bets (trading options) that the stock would continue to decline.
Reddit said otherwise. Reddit banded together and overtook the system. With the combined buying power of r/wallstreetbets, the community catapulted the stock price and caused many institutions to completely lose their money invested.
To quote Business Insider:
Melvin Capital required a $2.75 billion cash infusion from Steve Cohen's Point72 and Ken Griffin's Citadel to help it weather the losses from a short position.
Robinhood’s Refusal to Sell Stock
On Thursday, Robinhood decided to refuse the right to buy these select stocks with high volatility for retail investors. This has huge implications for what the “free” market means in today’s society. Essentially, by refusing the right to buy these stocks, Robinhood has sided with the elite as millions of investors pledged to close their accounts once this situation resolves. Robinhood cited that they do not have the funds on hand to support these types of trades.
With only the capability to sell stocks, this is a classic case of supply and demand. As people sell, investors are only limited to a diminishing stock price.
As of Friday, Robinhood announced that they would allow limited buying of these securities.
Conclusion
There are plenty of “meme stocks.” These meme stocks are intended to boost the r/wallstreetbets earnings. Why? For absolute profit. It doesn’t matter if a corporation has been on the decline or bleeding out from an unsuccessful business model. In the upcoming weeks, I’m unsure on whether we’ll see the continued increase of GameStop's share price. Have we reached the pinnacle or can a band of Wall Street pirates push the stock to the moon?
If you’re interested in hearing about other meme stocks, check out memestocks.org.
As always, thanks for reading, and have a great week.
-Jordan
1/29 Update: The number of r/wallstreetbets subscribers has increased to 6.1MM in the past week alone.