Novice Investors Battle Wall Street With GameStop
A collective attempt from novice investors to give financial market traders a taste of their own medicine has thrown Wall Street into turbulence.
GameStop, a chain of stores selling video games and merchandise, has long been loss-making. However, seemingly out of nowhere, shares jumped from less than $20 to nearly $350 on Wednesday.
Independent traders, mostly from the social media site Reddit, exchanged tips and hatched a plan to create a buying frenzy and generate profit.
Knowing that hedge funds had assumed GameStop’s shares would continue to fall, and that they would have to purchase shares to cover losses if prices rose higher than expected, the Redditors collectively agreed to buy shares in the struggling company, causing the surprise rise.
This method has now been applied to other struggling companies, such as the owner of Odeon Cinemas, and has taken hold in stock markets around the world, including the UK.
For many independent traders, this has meant that small investments have grown to staggering amounts.
As some platforms, such as Robinhood, an app used to buy and sell shares, lost their nerve and restricted trading, the price did drop slightly on Thursday.
A sudden price collapse could lead to painful losses, however by the next day shares were rising once more as the small-time traders urged one another to hold out.
Some big-name hedge funds, such as Point72, Maplelane Capital and DI Capital, have lost out, having shorted against GameStop, and the heavy losses are combined with allegations that they and their families have been harassed on social media.
The battle against short-sellers is thought to be one of the factors contributing to wider declines in the US markets recently.
The market manipulation has drawn concern of impacts on the wider economy from some, such as Senator Elizabeth Warren, who believes the episode should be investigated and is in favour of tighter regulation.
It is hard to predict how long novice investors will hold out on GameStop stocks, and whether it will continue to rise or come crashing down. However no matter what happens, the company itself is still facing significant difficulties which won’t disappear.