Students can learn important lessons from the GameStop short squeeze

%22GameStop+%28Connecticut+Post+Mall%29%22+by+jjbers+is+licensed+under+CC+BY+2.0

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“GameStop (Connecticut Post Mall)” by jjbers is licensed under CC BY 2.0

Samuel Abourezk, Staff Writer

In Aug. 2020, the GameStop stock price hovered around $5, then shot up to its peak of $347 on Jan. 27, 2021. The price has risen nearly seventy times its original cost since August. The skyrocket in the stock’s worth is due to enthusiasm created from the social news website Reddit, specifically the subforum, Wall Street Bets. 

The incident began when Reddit users noticed hedge funds shorting GameStop stock. Shorting occurs when investors borrow a share and immediately sell it, believing that they can buy it later at a lower price, return the stock to the lender, and then keep the profit. When the lender loans the stock, they charge a small fee when doing so. 

Reddit’s enthusiasm behind the stock led to a short squeeze, which is a rapid increase of a stock’s price due to a lack of supply and an excess of demand for the stock. Short sellers are then forced to buy back the stocks that they shorted at a loss, which also increases the price of the stock. Investing firms have lost billions of dollars due to the short squeeze of the GameStop stock. 

There are numerous causes for the short squeeze, which created the perfect storm. Some Reddit users invested in hopes of making lots of money quickly, and others wanted to punish the Wall Street hedge funds that they believe contributed to the financial crisis of 2007 and 2008. The ease of access to the stock market through social media and brokerage apps also helped. 

Investing for purely political reasons hasn’t occurred at the scale that the GameStop stock short squeeze has. LSE

Economics teacher Chris Salem said that the large-scale investment is “a nod to the power of communication through social media.”

Salem also wants to teach that “this story is not representative of how the stock market operates.”

Only 14% of American families own stock, according to Federal Reserve data from 2016. Salem says that “very few Americans own stock, and even fewer short sell.”  

When the short squeeze occurred, stock brokerages like Robinhood and TD Ameritrade prevented users from buying GameStop stock. These brokerages did so to protect the market worth of the hedge funds who shorted the stock, to prevent further losses. They have been met with harsh criticism due to their decision in protecting wealthy investors. Senator Ted Cruz and Representative Alexandria Ocasio-Cortez have criticized the actions of the brokerages, calling them market manipulators. 

Senator Elizabeth Warren wrote on Twitter that “For years, the same hedge funds, private equity firms, and wealthy investors … have treated the stock market like their own personal casino while everyone else pays the price.”

On Jan. 28 2021, A Robinhood user sued the company for denying trade of GameStop stock, accusing them of “manipulating the open-market.” 

The enthusiasm behind the GameStop stock has generated a newfound interest in the stock market. Netflix plans on developing a movie based on the GameStop short squeeze. The Redddit subforum that started the short squeeze, Wall Street Bets, gained 1.5 million followers overnight, and currently has 6 million followers. Businessman and Shark Tank investor Kevin O’ Leary believes that the short squeeze has sparked an interest in investing, and has taught people financial literacy through real world events.

Salem adds to this, saying that “potential investors still need to be educated about what their goals are, and how the market works.”

The events of the GameStop squeeze is historic for the stock market, and has altered people’s perspective of the economy.