GameStop was once one of the most popular stores to purchase video games around 2006 and 2013. Now, it’s expected to go out of business during the digital age. So, why has GameStop been reaching so many headlines recently?
A reddit group, known as WallStreetBets, focuses on trading stocks such as GameStop (GME), AMC (AMC) and Sundial Growers (SNDL), a cannabis stock.
While trading groups have always existed, there has been a popular surge in them after WallStreetBets organized a pump and dump, an illegal method to cause the price of a stock to skyrocket because of how many people are buying it, not because of the business itself.
On Jan. 21, SNDL was valued at $0.661 a share, making it a penny stock, meaning that it was incredibly cheap to buy and trade. On Feb. 10, though, it reached $2.95 a share, growing about 446% during that time period.
A similar story can be told for AMC. AMC, a movie theatre that had to shut down during the COVID-19 pandemic and faced bankruptcy, was valued at $2.30 a share on Jan. 15 and made it all the way up to $19.90 a share on Jan. 27.
GME had the largest growth compared to all of the other stocks. GME had a share value of $17.69 per share on Jan. 8 and went up to $347.51 by Jan. 27, putting it at 1964% growth.
All of these stocks crashed drastically after hitting these prices, and it’s not because these trading groups stopped buying it or told everyone to sell it, but because common brokers that trade stocks, such as Robinhood, prevented people from buying shares.
Before diving into why Robinhood stopped people from buying shares for these stocks, it’s important to understand some terms such as pump and dumps, hedge funds and short selling.
According to Investopedia, a pump and dump is a scheme that tries to artificially inflate the price of a stock based on false, or misleading claims, in order to sell that stock at a higher price. People who are found organizing these pumps and dumps are subject to heavy fines; however, if you simply buy into a pump and dump and don’t arrange one, it is not illegal. The subreddits said that they were not providing financial advice, and therefore there was not illegal activity.
Hedge funds are pooled investment funds that are able to take advantage of complex aspects of the stock market such as short selling. An example of short selling would be someone buying a candy bar at one dollar, promising to the shop owner that they would give it back. Then, when the price of candy bars decreases, he would return it to the shop owner and end up making a profit.
Short selling is essentially what hedge funds do, and they have immense power and sway over the stock market. When AMC, GME and SNDL started to go up, hedge funds began to lose money. They borrowed the stock at a lower price and had a set date they had to return it by, and since the price ended up increasing and not decreasing, they had to return the stocks for a loss. Since they originally bought so many stocks, this drove the price of the stock higher and higher.
The controversy explodes with Robinhood. Robinhood is a broker for trading stocks founded in 2013, and since then, has become incredibly popular for having commission-free trading options. When many people were buying GME in an attempt to get in on the pump and dump before it fell, Robinhood restricted people from buying this stock in an attempt to prevent the price from increasing.
According to Motherboard, more than half of all Robinhood investors owned some sort of GME stock and were now limited from being able to freely trade it, which led to a class action lawsuit with Rosen Law Firms Files Securities against Robinhood for their restrictions.
It’s not just kids on Reddit being upset over this either, as congresswomen Alexandra Ocasico-Cortez (AOC) and Elizabeth Warren, among others, began to speak out against these limitations.
One early class actions lawsuit in Massachusetts says, “purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood customers.”
On Warren’s government website, she claims in a video, “Robinhood has a responsibility to treat its investors honestly and fairly, and provide them with access to market under a transparent and consistent set of rules. It is deeply troubling that the company may not be doing so.”
AOC tweeted “This is unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.” Ted Cruz responded with how he “fully” agreed with her.
Robinhood has since then opened up and allowed trading of these stocks once again; however, the situation is still sticky. AMC, SNDL and GME all had their prices drop immensely, but they’ve begun to increase once more. The situation surrounding WallStreetBets and these stocks are still being investigated and should be observed. Buying into any of these stocks would be extremely risky, but some have found it to be a quick and easy way to get cash fast.