How GameStop (GME) found itself in the middle of a Wall Street war


it is difficult for anyone to try and confidently understand the implications of the meteoric rise of Gamestop (GME) stock over the past five days. From sub $10 at the end of 2020, to $42 days ago, to now $342 dollars, the initial retail trading community at /r/Wallstreetbets has made financial history by leveraging hype and enthusiasm that oftentimes resembles a viral meme.

MORE: Wallstreetbet MODS speak out on GME, Elon Musk, and making stock market history.

 

Some experts are claiming this "Reddit rebellion" marks a shift towards the further decentralization of the stock market and the rise of the non-professional retail investor. They cite Tesla stock (TSLA) and Bitcoin as two other examples of assets whose value was initially created and continually fueled by the support and belief of millions of retail traders as opposed to the institutional support of hedge funds.

 

What is /r/Wallstreetbets?The TL;DR


The simplified strategy of /r/Wallstreetbets is for retail traders to gather together and share information or catalysts that may mark a good time to buy or sell a stock. The community has proven successful in its ability to identify stocks that large hedge funds or professional Wallstreet traders don't have much confidence in. When the pro-traders bet that a stock will fall, Wallstreetbets stands to gain when their community's enthusiasm over that stock makes it rise instead.

 

When this happens, the institutional traders who "short" that stock only have one option — buy back the stock before the price rises too high and they lose catastrophic amounts of money. This is often referred to as a "short squeeze" and GameStop is currently experiencing a massive one.

 

Why GameStop?

 

2020 caused Gamestop to shut-down a lot of their retail stores and also report lower retail sales. This plus the perception that Gamestop is a brick-and-mortar dinosaur fated to become the next Blockbuster caused the stock to fall to an all-time low of $2.20 in April of 2020.  As a result, the professional traders of Wallstreet made a lot of bets that GME stock would continue to drop.

 

But that isn't the full story of Gamestop. 

 

Users on /r/Wallstreetbets started to make very convincing arguments as to why GME is a much healthier stock than people realized.  First was the public buy of 9M GME shares by Ryan Cohen, founder of Chewy, then an unexpected 309% rise in Gamestops 2020 holiday e-commerce sales (resulting in 1.35B in total 2020 holiday sales). As GameStop announced their pivot to an e-commerce focused business, the retail traders of the internet were already sold.

 

"We like the stock!" became the rallying cry of those in support of GME, despite the massive bets of the stock's failure by institutional trading groups.

 

The meme factor and rise of the retail trader


When Elon Musk starts Tweeting about a stock, everything changes.  Musk once tweeted about liking the online marketplace for creators and Etsy (ETSY) stock rose 3.5%. So it should serve as no surprise that Musk has also taken an interest in the battle between GME retail traders and institutional ones.

 


With Musk stepping into the picture, all bets are off on the future of GME stock. This level of stock market volatility is rare and even veteran traders admit they have never seen anything like it. There is a sense of glee in Musk's Tweet and the rest of social media's attraction to GME. To many, the rise of GME stock represents a shift in power between normal people and massive investment firms.

 

To some traders at /r/Wallstreetbets, the success of the GME short squeeze has been life-changing.

 

As social media communities like /r/Wallstreetbets continually grow in both sophistication and numbers, their influence and ability to challenge unchecked bets of institutional hedge funds to grow.

 

The reality is 93% of the U.S are still employed and the nation's lock-down protocols have made casual stock trading a popular quarantine hobby — what else can people spend their money on? More people are using their money to trade stocks online and communities like /r/Wallstreetbets are, for better or worse, taking full advantage of this momentum.

 

 

Professionals on Wall Street label these groups as "rebellious" and "wild" which usually leads to further financial upheaval. Emboldened, this new class of traders has begun to express open resentment at how quickly big finance is attempting to crush its trading strategies

The /r/Wallstreetsbets community has rallied against the media and professional traders that seek to discredit their trading strategies



A lack of trading experience or sophistication matters little when a short squeeze strategy is embraced by millions. As it stands today, some Redditors have become millionaires overnight and the hedge funs who have shorted GME are likely doomed to suffer huge losses. 


The only thing anyone can say with certainty is that the GME story is very much still ongoing. The most rabid of supports predict target prices of $1,000 and higher — as absurd as it sounds it isn't something anyone should totally rule out. The rise of GME and /r/Wallstreetbets is equal parts a story of human desire, internet memes, and legitimate financial strategies that have demanded the attention of the international stock trading world.

 


As much as this is a surprise to the majority of the world, a Tweet from Jaime Rogozinski, the founder of WallStreeetBets, tells a different story. Apparently, the warning signs about this precise scenario were clear, but brokers lacked a "proper stress test" to realize what might happen if massive groups of retail traders called their bluff.

GME may not have been the test brokers wanted, but it has proven terribly effective teacher.

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