How GameStop And Other "Meme" Stocks Became The Centerpiece Of A Stock Market Frenzy

If you have been paying any attention to the news over the past few weeks, you may have heard of the exponential rise and the equally dramatic drop in the share price of video game retailer GameStop (GME) and other "meme" stocks — those favored by millennials — like AMC Theaters. The two-week frenzy, which pitted individual amateur investors against seasoned professionals — and resulted in a Congressional inquiry— began rather innocently in an online community on Reddit.

In early January 2021, Player896, a member of Reddit's r/WallStreetBets community known for making risky market bets, submitted a post making a case for buying GME shares. The video game retailer's stock price, which had been on a steady decline since 2015, had fallen to new lows after the company reported lower-than-expected earnings in December 2020.

Player896, later identified as Keith Gill, argued that the company's recently-implemented online sales strategy was starting to work, and asserted that GME shares were significantly undervalued. His conviction was further strengthened on January 11, 2021, when GME announced that Ryan Cohen, the co-founder and former CEO of the wildly successful online pet health company Chewy, would be joining the company's board.

The steady purchase of GME shares by Reddit investors caused the price to rise more than 50 percent in just two days. Soon, retail investors countrywide — eager to make what appeared like easy money — jumped in. "In this sort of Wall Street bets culture, people take screenshots of how much money they've made or lost to kind of show off," said Ciamac Moallemi, a professor at Columbia University's business school. "And as they sort of advertised that, people started piling into the trade, and the momentum built.”

In just nine days, Gamestop’s stock rose 1800 percent to a mind-boggling $380 per share! Just as it seemed that the price had peaked, Elon Musk entered the fray. Known for his eccentricity and love of meme culture, the Tesla CEO tweeted out to his 45 million followers, “Gamestonk!!” and included a link to r/wallstreetbets. His seeming endorsement caused the GME shares to rise further to an all-time high of $483 per share!

The high stock price proved disastrous for large institutional investors who had "shorted," or bet against GME. Short-selling, a common practice amongst seasoned traders, is a complex, high-risk trading strategy. It entails borrowing a company's stock from a lender, selling it at the current price, and repurchasing it when it's time to return the loan. The strategy is based on the assumption that the company's share price will trend down, allowing the short seller to repurchase the stock at a much lower price and profit off the price difference.

However, if the stock rises, the traders are forced to buy back the shares at the higher price, resulting in large losses. This was certainly the case with two of GameStop’s largest short-sellers, Melvin Capital and Citron Research. The former experienced losses so large that it was forced to seek out a $2.75 billion bailout from another hedge fund. By January 27, 2021, both investors had closed out their short positions in GME, taking a 100 percent loss.

As seasoned traders dealt with severe losses, amateur traders celebrated their highly-valued shares, which netted them thousands and, in the case of early investors like Gill, even millions of dollars. Jaydyn Carr, a fifth-grader from San Antonio, Texas, made national news after selling his 10 GME shares, purchased for $60 in 2019, for $3,000. Invigorated by these success stories, amateur investors began to drive up the prices of 50 other heavily-shorted companies, including AMC, Blackberry, and Bed Bath and Beyond.

The stock euphoria balloon burst abruptly on January 28, 2021, when popular trading platforms like Robinhood and TD Ameritrade restricted the trading of GME and the other meme stocks to just sales. While the unprecedented measure, purportedly taken to "mitigate investor risk," caused an uproar among both customers and lawmakers, the damage had been done. As panicked individual investors rushed to offload their holdings, the stock prices dropped rapidly, resulting in sizeable monetary losses for many.

Many experts argue that instead of the “David Vs. Goliath” scenario depicted by media outlets, the meme stocks frenzy serves as an educational warning to those looking to get involved in the stock market. "The question is, do these retail investors understand what they're doing? And does their outsized influence represent risk to the markets?" said Scott Galloway, a professor of marketing at the New York University Stern School of Business. "Do we have a new level of systemic risk injected into the market by individuals that appear to be more gambling, if you will, than actually investing?"

However, despite the risks, even the amateur investors who lost money do not regret their siege against Wall Street traders. “We’ve helped expose normalized exploitation of the market, and now the right people are getting involved,” quipped a Reddit user. “It was 100% worth it."

Resources: VOAnew.com, marketwatch.com, CNBC.com, ABCnews.go.com