Stock Market Fiasco
Carla Paz-Almonte
In the last two weeks, major companies like GameStop went from expecting to lose money to their stock values going up by 275%. Many other companies such as AMC, Blackberry, and Macy’s also experienced significant unexpected stock increases recently. So who exactly was behind this development? And how and why did these struggling stocks see such dramatic increases?
It all started with a group of Reddit users known as the ‘WallStreetBets,’ who are a group of investors that give each other advice on where and how to invest. This group has been around since 2012, but because of economic struggles brought on by the pandemic, their popularity has grown tremendously. The reason why this group invested in struggling companies like GameStop and AMC is so that hedge fund companies do not profit off of these companies losing money. A hedge fund is an investment that uses borrowed money and high risk methods to obtain higher capital. They use short sales, which rely on selecting which stock is going to fail to accomplish this. When a stock for a company such as GameStop goes down, short sellers make money off of it. If the stock goes up, these short sellers lose their money, which in turn makes the hedge fund lose money. For the Reddit group, investments in these companies mean potential profit for investors and the loss of profit for hedge funds. Because of a series of investments made by the Reddit users, GameStop is now part of the Fortune 500, which is a group of the largest 500 companies in the world.
One of the group's biggest reasons for investing in these companies is to get back at hedge funds for their involvement in the financial crisis of 2008. Many of these Redditors’ families were personally affected by the crisis, with many losing their homes or money. One Reddit user wrote: “When that crisis hit our family, we were able to keep our little house, but we lived off of pancake mix, and powdered milk, and beans and rice for a year." The group sought out to punish these hedge fund managers for putting their families through financial turmoil.
Many of the Redditors who bought these stocks are now becoming millionaires overnight. The majority of these investors are regular people with regular jobs using their newly earned profits to pay off college debts and hospital bills, with some even donating portions of their earnings to charity. Tyler Ehrlich, a member of this subreddit explains it best: “And there's plenty of people in there like myself, I don't have a job. You know, I've been screwed out of work, all this stuff. But then we're all just idiots trying to make money on the stock market.” Hundreds of users like him made risky bets that could have cost them thousands..
The platforms the stocks are being brought on, Robinhood and TD Ameritrade, have since restricted the amount of stocks you can buy in AMC and GameStop. This move was met with strong criticism from both Democrats and Republicans. U.S. Representative Alexandria Ocasio Cortez tweeted, “This is unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, I’d support a hearing if necessary.” Even Republican Senator Ted Cruz tweeted, “Fully Agree” to AOC’s comment. The government is also monitoring the situation in case of the possibility of illegal actions being taken by either side. Many Democrats have called out hedge funds and their practices in the past, saying that hedge funds use the stock market for their own benefit and let everyone else involved suffer the consequences of their choices.
In response to the stock market controversy, the Senate Banking Committee has decided to hold a hearing to appease the Democrats and Republicans who disapprove of hedge fund practices. Though many Redditors can lose money because of their risky betting practices and the fact that the stock market is always fluctuating, their mini revolution has the potential to create great change.
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