How an army of Reddit users rattled Wall Street
An army of Reddit users have shaken Wall Street and made a huge amount of money in the process.
Stocks for GameStop, a US video game shop chain listed on the New York Stock Exchange, have surged 1915 per cent since the start of the year.
The massive surge has been driven by enthusiastic investors on Reddit’s r/WallStreetBets forum, many of whom are students.
The Reddit traders discovered some major hedge funds were trying to short sell Gamestop shares — buying up shares in the hope they’ll tank.
‘Shorting’ involves buying shares and immediately selling them while the price is high, then buying them back later and returning them to the broker they were purchased from, pocketing the difference.
But Reddit investors banded together to buy up GameStock shares, driving up the price.
3AW finance correspondent, Scott Haywood, says that’s left hedge funds in what’s known as a “short squeeze”.
“What that has caused is a short squeeze, which means if you’re a hedge fund and you’ve said ‘I think this stock is $10 and it’s going to go down to $5, and it hasn’t, you’ve already lost your $5, and then they’ve had to buy it back at say $25 hoping it goes back up.’,” he told Neil Mitchell.
By buying more GameStop shares in a bid to mitigate their losses, the short sellers are inflating the share price even more, leading to a windfall for Reddit users who have already invested.
Press PLAY below to hear Scott Haywood’s explanation of what’s happened.
Some investors on the r/WallStreetBets forum have reported they’ve been able to pay off their student debts by cashing out small amounts of stock purchased only weeks earlier, but founding partner of Sayers, James Wright, doubts the pattern will continue.
“I think it’s one of those things where the first one works, and the second one doesn’t work quite as well,” he told Ross and Russel.
“People will think it’s a great game until they start to lose money over and over because the valuations of the share prices just can’t be sustained, they tend to fall back.”
Press PLAY below for more from James Wright.