In 2020, it appeared that GameStop was about to go under. They’d been struggling for a while as their brick and mortar businesses weren’t standing up to the digital world and then COVID rendered them almost irrelevant. GameStop was on a huge losing streak until the great Reddit coup of 2021.
At the beginning of 2021, GameStop stock was selling at $18/share, but something was happening. Big investors were shorting the stock, meaning investor one was giving his stock to investor two to “hold” temporarily. Investor two thought he’d make some money off of this deal, so he sold all of investor one’s stock, guessing that the price would be dropping soon. He then plans to buy back the stock at a lower price and pocket the profit before giving the stock back to the investor one. It’s not an uncommon practice, but many think it should be, as it is “cheating” the system.
Unfortunately for investor two, this time some Redditors noticed what was happening and they decided to teach the big investors a lesson. So these small-time Reddit investors bought up all the GameStop stock, which caused a huge spike in the price. In fact, from January 7th to January 28th, GameStop stock shot up by 1,250%, and the S&P 500 fell by 2.6% on January 27th.
Naturally, that meant that investor two then had to buy back all of investor one’s stock at a massive loss rather than pocketing a profit.
As this all played out, none of the players actually did anything illegal, but it does raise some important questions about stock market regulations and whether or not we need to make significant changes.