Meme stocks have been grabbing headlines lately, but what exactly is a meme stock?
Simply put, it’s when a company’s stock price experiences rapid fluctuations, driven by the intense interest of an online community. To shed light on this concept, let’s take a closer look at one of the most iconic examples: GameStop.
To really understand this story there are three characters you need to know:
1. GameStop: A Struggling Game Store Chain
2. Wall St Bets: A Reddit Community of 2 Million Subscribers Taking on Wall Street
3. Shorting: Betting Against a Company’s Stock Price
The year was 2021, people were at home, and GameStop, a struggling chain of game stores, was in dire financial straits.
Many investors predicted its impending demise, drawing parallels to the downfall of Blockbuster. In response, heavyweight investors decided to “short” GameStop’s stock, essentially betting that its share price would nosedive. If they were right, they would make substantial profits. However, if they were wrong and GameStop’s stock price soared, they would incur significant losses.
Meanwhile, over on Reddit, a page called Wall St Bets, (a community with 2 million subscribers hell-bent on shaking up Wall Street), a different narrative was taking shape.
These Redditors, motivated by a desire to prevent well-heeled financiers from profiting off a beloved company’s downfall, banded together to buy GameStop stocks, driving the stock’s price upwards. Institutional investors found themselves in a tricky situation.
But the story doesn’t stop there. Those who had initially bet against GameStop’s success decided to flip the script and buy into the stock as its price continued its upward trajectory. This phenomenon is referred to as a “short squeeze,” where a stock’s value skyrockets, compelling traders who had wagered on its decline to purchase shares in a bid to mitigate their escalating losses.
Consequently, GameStop’s stock price kept climbing. Reddit users reaped substantial profits. For instance, if you had purchased 100 GameStop stocks at $40 and sold them at $160, you would have made $12,000. In contrast, investors who had shorted the stock lost a lot of money.
Ultimately, this narrative resembled a classic David vs. Goliath tale. Giant investors found themselves outsmarted at their own game by a collective of online traders, operating from their parents’ basements but unified in their mission. That internet thing… it’s pretty powerful!
