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How Reddit and GameStop Broke the Stock Market

GameStop | Photo Courtesy of Wikipedia Commons

GameStop | Photo Courtesy of Wikipedia Commons


The actions of a Reddit subgroup known as r/wallstreetbets have recently drawn in attention from Congress as Reddit members caused an entire hedge fund to go into bankruptcy over GameStop stocks. 

Stock market 

The stock market is where investors can buy and share investments or stocks, which are ownership shares in a publicly traded company.  

“When it goes down too much for you to bear, you sell. In theory, whether the value goes up or down depends on news surrounding the stock, which usually has to do with the underlying company. The underlying assumption is that the market as a whole generally goes up, so if you buy a diverse enough set of stocks, over time you are bound to make a profit,” said Washington Post writer Mikhail Klimentov in a recent article.  

The stock value for GameStop had been decreasing over time due to the fact that the video game market is moving more digital with each passing day. The availability for gamers to purchase games digitally instead of visiting brick and mortar GameStop locations led to many store closures across the United States.  

The GameStop stocks were being short-sold, which means they were selling a stock for a very high price and then purchasing it for a lower one, rather than buying the stock at a set price and then selling it for higher.  

“But how can you sell a stock that you don’t own? You have to borrow the stock from your broker. When you buy the shares back at the end, then you return the shares to your broker, thus satisfying the loan,” said Wright State University (WSU) Assistant Finance Professor Kyre Lahtinen.  

GameStop 

In recent weeks, members of the Reddit subgroup r/wallstreetbets noticed a hedge fund (similar to an investment company) was short-selling GameStop stocks. As a response, the majority of the Reddit subgroup purchased as many GameStop stocks as they possibly could, causing the hedge fund to lose over $13 billion and go into bankruptcy.  

“GameStop shares would go from trading at around $43 (already significantly more than it traded at at the beginning of the year) to as much as $380, becoming one of the most traded stocks on the market along the way,” said NBC writers David Ingram and Lucy Bayly in a recent article. 

GameStop is one of multiple stocks that have now been placed on a restricted trade list as the United States Congress considers investigating the situation to determine if stricter regulations need to be placed on the stock market.  

“The GameStop situation has raised concerns within several legislative and regulatory bodies. For example, there are people in the US House of Representatives, US Senate, US Department of the Treasury, state officials in New York and Texas, and others who have indicated that they will look into what occurred to see if any regulatory, legislative, or enforcement actions are necessary,” said Lahtinen.  

Lahtinen also said that it is a waiting game to determine what steps Congress will take in response to the situation, if any.  


Kaitlyn Chrosniak

News Reporter