GameStop surges and crashes in value after stock market short selling

The video game retail store was one of many companies caught in the middle of a stock market overhaul that began Jan. 13 when short sellers schemed over social media. DANIEL PEARSON, Staff Photographer

The success of stock market short sellers in a coup against corporate hedge funds was short-lived. But the economic phenomenon of buying shares in struggling companies, referred to as “meme stocks,” managed to leave its legacy on social media regardless.

Users on Reddit took to r/wallstreetbets, a subreddit within the social network and discussion website, to exponentially drive up shares in companies like GameStop and AMC Theaters  — creating what’s known as a short squeeze  — and collectively profit from selling back those same shares.

The purpose? Driving hedge funds and their benefactors  — who were counting on those stocks to drop and therefore lost billions of dollars  — to the ground. Social media platforms like TikTok only helped stimulate the cause further after some users uploaded stock market videos. Robinhood and other stock trading apps, meanwhile, temporarily limited the number of shares that investors could buy. Since, GameStop’s shares dropped from their highest value of $483 on Jan. 28 to $54 as of Feb. 4.

Mitchell Warachka, a business and economics professor at Chapman University, believes the rise of social media made it easier for noise traders — uninformed investors who invest without the aid of financial experts — to organize themselves. He expressed belief that investors targeted certain stocks that were dealing with short selling, but didn’t buy the notion that the social disparity of income inequality was a major cause of the phenomenon.

“I’m sure there’s people participating from all walks of life,” Warachka said. “My guess is (there were) many children who had wealthy parents who also decided to participate in this. I don’t think this was exclusively lower-income people who were participating.”

Warachka said that this behavior in the stock market is not unprecedented, referring back to the late 1990s and early 2000s when investors poured money into Internet stocks like Yahoo! under the assumption that they would be successful in the future. That stock situation faced a similar resolution: the stocks declined sharply and many traders lost money.

“In the end, the herd generally loses money,” Warachka said. “My guess is that most of the small investors who were piling on, if they haven’t already lost a fortune, they probably will …They pushed the price up way too high with their coordinated buying activity and most of them unfortunately  — the ones who piled on later, who joined the herd  — will not make money.”

He believes that while a phenomenon like this could happen again, it would most likely be started by a new generation of investors who did not participate in this event, since those in the current generation who lost big would not want to try again for a few years.

Anika Nguyenkhoa, a freshman business administration major who said she has been investing in stocks for about a year, found out about what was happening with the “meme stocks” from TikTok. Initially skeptical, she decided to research and later bought 10 shares each through Charles Schwab from GameStop and AMC Theaters, estimating that each share cost $80. Nguyenkhoa said she was scared about the situation and only held on to her shares for two days. After making around $500 to $700 total, she felt she had enough of a profit and decided to sell them.

“It’s kind of a guessing game. You just have to kind of hope and pray and see how it goes,” Nguyenkhoa said. “(The) government and media … do have a big impact on how the stock market goes, but with the attention it was getting, I knew that it was a one-hit wonder and it was going to go down eventually.”

She said that the experience was a big learning curve for her and that her biggest takeaway was how simply a unified group of people could change the stock market.

“From this, I’m a lot more well-informed on how it would go and so I have a better idea of how much I’d be willing to put in,” Nguyenkhoa said.