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Wall Street vs. Reddit: A Run Down (For Dummies)

Reddit vs Wall Street

If you have been following the news, then you’ve probably heard about the ginormous kerfuffle that went down recently. Concerning what? How Reddit conquered Wall Street through GameStop stocks in a roller coaster ride. That is Wall Street vs Reddit.

Founded in 2005, Reddit is a popular social media platform and discussion website, known for its laissez-faire attitude and cut-throat nature. A variety of cultural touchstones stemmed from this digital corner – from charitable and social movements to vicious conspiracy theories, and even more unpleasant phenomena.

Over the years, Reddit managed to make a name for itself, and a reputation as well. It became known as the venue where one can experience the internet at its best, as well as at its worst. Given the platform’s almost unfiltered nature, its users always felt free to deliberately express their opinions, no matter how problematic. Needless to say that many of the controversies that originated on Reddit quickly spun out of control.

Over the past few weeks, a community on Reddit – r/wallstreetbets – organized a coup on Wall Street, which quickly gathered global attention, being recognized as a monumental event in modern financial history. 

What happened in a nutshell (dumbed-down version)

In recent years, many Wall Street hedge funds have been investing in nearly-bankrupt companies (e.g. GameStop), hoping to make a quick buck through short selling. For those who know nothing about all-things-finance (such as yours truly), short selling stocks consists of borrowing a stock from a dying company, selling it on the market, and then buying it yourself to return it to its original owner. The main idea is that once the stock is sold on the market, its price will go down given the company’s status. Thus, when buying it, you will pay less than what you sold it for, and you will pocket the difference, minus an interest fee you will have to pay to the original company. Sounds easy, doesn’t it? Well, there’s a catch – if the price of the stock goes up after you sell it, you will have to buy it for more, losing money and being “royally screwed”.

The way a stock’s price can go up is through inflation, that is if several people decide to buy the share, boosting its value. Short sellers would then buy the stock for a higher price and then resell it for that same amount, over and over until the value goes down. However, this can be an extremely risky business because if the price doesn’t go down soon after the purchase and the short seller is forced to re-buy it several times, a lot of money will be lost in the process. Moreover, the longer it takes for the stock to drop, the higher the interest fee, which arguably increases financial damage. 

That’s exactly what the Reddit community did with GameStop (GME). A lot of people on the platform put their minds together and decided to execute a short squeeze on the company’s stocks. That is, they began buying shares, causing the price to go up. Short sellers – who underestimated the situation – bought back the shares and re-sold them, thinking the squeezers would be satisfied with the tidy profit. Wrong. The Reddit squeezers meant business and kept rebuying the shares, which inflated the stock’s price by more than 700%/share. Short sellers were taking a bath.

The aftermath

If that wasn’t clear enough, hedge funds were pissed. The trading and investment landscape has always been gatekept by big financial companies. Thus, they were certainly not pleased when they saw all of these average Joes conquering their turf. Therefore, they soon began to strike back.

Most of the investment actions took place on trading apps, such as the ironically named RobinHood, managed by hedge funds. Once they saw that the retail investors (i.e. the average Joes) were not playing around, the apps began preventing them from buying GME shares – they could only sell the stocks that were already being shorted. This was, by any means, questionably legal and unethical, and was done only because the apps wanted to gather enough liquidity to protect themselves. However, this only made the community stronger, as the Reddit investors carried on with their mission.

Why any of this matters

So far, only the “Big Sharks” have been allowed into the arena, but now the “Little Guys” could finally have a shot.

I know what you’re probably thinking right now – Why should I care? Well, to keep it simple, this whole financial coup might be the first stepping stone towards a truly accessible market. So far, only the “Big Sharks” have been allowed into the arena, but now the “Little Guys” could finally have a shot. Some bystanders are even saying that this might be the beginning of a new, immediate form of collective activism in the fight against capitalism.

Moreover, this conundrum once again confirmed the impact and mobilizing power social media have nowadays. The whole takeover started as a meme on the Reddit community r/wallstreetbets under the hashtag #gamestonk and quickly turned into a massive event in financial history.

Actually, the only reason why this was possible is social media. Now, with just a click, you can easily access a plethora of financial literacy and education. Ergo, to embark on the journey of trading and short selling, you don’t really need to go to some fancy Ivy League University – your laptop and an Internet connection will do.

All in all, no one knows what the exact ramifications of #gamestonk will be – is it the beginning of a new era in finance and economy, or will it soon be cast aside like an old failed meme? Only one thing is for sure – the battle is not over yet.

 

Cover: BigStok/Ira Lichi

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