The whole war against the establishment took on a whole new sinister form of financial war between the self-proclaimed iconoclasts of a subreddit r/WallStreetBets and the universal demons of their namesake, The Wall Street. Their tussle took the stocks of a compact disc retailer, Gamestop soaring and falling three quarters when the bell rang. Traders lost billions while the members of this subreddit danced, as the world watched the first instance of social media-driven manipulation of stock.
What Happened To Gamestop’s Reddit Fueled Rollercoaster Ride?
The penny stocks of Gamestop were speculated to be overvalued by prominent hedge funds of Wall Street and they anticipated the stock to fall soon and shorted it; a process consisting of borrowing stocks from a broker who agrees to buy them back, if the stock rises, au revoir, but if it falls then the borrower pockets the difference. A version of shorting took place in 2008 when the housing bubble burst. The then Robin hoods of the stock market shorted housing stocks and earned millions when the stocks crashed.
This time, however, a small subreddit of traders influenced an entire community to start buying Gamestop stocks and drive them sky-high. All traders were able to participate through a brokerage/app called Robinhood which enables traders to buy stocks with no commission. Traders with a sudden bout of FOMO( fear of missing out) rushed in on the action and, in what is called a short squeeze in financial lingo, a penny stock worth $40 was worth $400 by the end of the evening. Owners of these hedge funds were forced to claim losses and cover their positions. The value or lack thereof of a penny stock like this quickly came down.
Although this isn’t the first instance of rising stock prices, the worldwide lockdown has witnessed massive infusion in the market and soaring stock prices completely disregarding the ground realities of a lot of these companies. Liquidity has flooded the market and traders have seemingly rationalized the high earning margin, completely disregarding the need for institutional mechanisms and instruments for their savings. All this makes for a volatile stock market and one that is cut off from the outside world, riding on a falling wave.
Who Does This Manipulation Of These Stocks Hurt?
To highlight one of the possible consequences of a volatile market, the majority of middle-aged traders investing with borrowed funds or with limited earning, driven by a social media website unknown to them will stand to lose hugely when an unavoidable crash happens.
What lies behind all this isn’t the fact that small traders and retailers with limited wherewithal won, it’s that ordinary traders stand to lose in the long term. This is an event borne out of a deeply rooted struggle against the establishment, and a load of FOMO.
The concerns about problems in the practice of shorting are real, they cannot however be addressed by make-believe battles like these. The value of a stock is connected to the real-time performance of its company and hence must be a face value of a company not what over-excited traders make it out to be. To Sir John Templeton and most unlike Bull markets, this maiden market was born on boredom, grew on ecstasy, and will fall on principle.
The Stock Market Doesn’t And Shouldn’t Go By The Number Of Eyeballs Theory That Social Media Loves
A phenomenon like this is entirely unregulated and could amount to stock manipulation and in their revenge reverie, our robin hoods forgot the rules that founded the stock market, what comes up must go down, and when that fall comes it will be hard for those who simply rode the wave. The result will be a slightly cautious WS, a few nascent millionaires, and those who rode the wave faced with absolute non-post-able horror.