Mania in the market

How a small band of traders turned into a true economic movement

Mania+in+the+market

Right now we may be seeing one of the biggest showcases of individual investment strength in recent American economic history. In an unintentionally Marxist fantasy, retail investors have collectively banded as one, in an effort to make a stand against the powerful market manipulators who have been controlling American financial markets as they please for the past several decades. At least that’s what the virtual narrative is saying. While what’s happening in the market right now may not be a full force proletariat uprising, the trends occurring do say quite a bit about the state of retail financial freedom and ability. Under a Reddit forum called r/WallStreetBets, users have pushed several low radar stocks and elevated them to absurd, unnatural values. What originated as a hub of memes and internet trolls essentially lighting their bank accounts on fire has turned into a site where progress wages war on tradition, populists push back on power, Main Street races Wall Street, and control of the market is truly anyone’s game.
What’s currently occurring in the stock market is a massive attempt at what’s called a “short squeeze.” With most basic trading, a buyer purchases stock (which is really just fractional ownership) from a company at a certain price and then sees benefits from the proportional shares of profit that company sees. If a company’s profits increase and if more buyers purchase shares from that company, the stock will rise. However if a company is consistently sold by investors and loses profit, their shareholders also proportionally suffer. If a company is predicted to drop in that fashion, investors can “short” them. In this set up, investors borrow shares of a stock at a certain price with the expectation that its price will decrease. If they are right, they buy those stocks at the discounted value and see profit in the difference.
Essentially, shorts sell first then buy afterwards, while normal stock ownership buys first then potentially sells afterwards. However, since the price of a stock that’s being shorted can increase, theoretically infinitely, shorts are much riskier than normal stocks. If one borrows 50 shares of a stock that’s valued at $100 a share with the expectation that that value will drop to $75, but instead it rises to $300 a share, that investor has to pay $15,000 for what would’ve cost $5,000, losing $10,000 in the process. Since stock prices can only go as low as zero but can increase forever, risky shorts are really only used by trading professionals. Many prominent shorting efforts are made by hedge funds, which are partnerships of investors who analyze market trends to make high risk yet high reward trades for their clients.
This financial jargon can get very confusing, which is understandable. Much of the tricky Wall Street speak that’s used works to deter retail investors from sticking their nose into market trends. However, in mid 2020, several people did just that. They observed that 84% of GameStop’s 65 million shares were being held short[1]. This meant that large hedge funds, such as the now infamous Melvin Capital, were shorting the stock at a massive rate. These individual investors thus decided to try and squeeze the reckless hedge funds, driving GameStop’s stock price up so they would have to sell at a higher price than they bought and lose millions. While losses were hefty for these hedge funds through most of 2020, it wouldn’t be until January of this year that the squeeze really began taking hold. News of the effort began spreading around the subreddit and the rest of the internet . Stories of users investing thousands yet seeing returns in the millions attracted countless new investors. GameStop went from being valued at $2.57 in April 2020 to a peak of $365 on January 27th, a growth of 14,100% in only six months[2].
Though the technical aspects of this financial movement are interesting, what truly stands out about it is the message it holds. For decades, retail investors have been looked down upon by the large investment companies on Wall Street. However, what this squeeze has displayed is that the individual participant in America’s trade market can have far more power than they’re credited for. While hundreds of thousands, if not millions, have recently joined the world of investing with lures of profits, what has held them together is the class struggle that has existed far longer than the stock market has. In a world so divided politically, socially, etc., the story of Wall Street Bets is a glimmering beacon of hope. While everyone still has their own personal agendas, the opportunity to work towards something collectively and truly challenge an elitist system is a sentiment most Americans can get behind. GameStop isn’t just an opportunity for normal people to make a profit by working together. It’s a symbol of the individual components that uphold all of our powerful systems. It’s a reminder that those systems are only as powerful as we allow them to be. While this movement won’t make countless individual investors rich, it won’t destroy Wall Street or crash the stock market, it will serve as a lasting reminder of the power the individual holds. That power is priceless.

Works Cited:

[1]Kochkodin, B. (2021, January 25). Bloomberg.com. Retrieved from https://www.bloomberg.com/news/articles/2021-01-25/how-wallstreetbets-pushed-gamestop-shares-to-the-moon
[2]Burrows, D. (2021, January 31). GameStop: How WSB beat hedge funds at their own game. Retrieved from https://www.kiplinger.com/investing/stocks/602158/gamestop-how-wallstreetbets-wsb-beat-hedge-funds#:~:text=At%20those%20levels%2C%20GME%20has,in%20the%20past%20month%20alone.