EARLY this year, the actions of GameStop, an American games retailer, looked like a terrible buy. Over the past decade, GameStop had lost market share as many millennials abandoned their physical stores to download or stream video games. Then the covid-19 pandemic completely closed its stores. Blood-smelling hedge funds sold their stocks short, meaning they would make money if GameStop’s value fell. But between the start of trading on Jan. 13 and mid-morning Jan. 28, shares of the struggling retailer instead rose 2,265%, from $ 20.42 to $ 483. Six months later, they’re still up to the task, albeit at a less stratospheric level of around $ 200. Within days, GameStop has come to illustrate “memes stocks,” companies whose stocks have become overvalued relative to the state of their underlying business thanks to a wave of attention from retail investors on social media. . AMC, a chain of movie theaters, and Bed, Bath and Beyond, a household goods seller, are among the other companies to have seen their share prices rise just as rapidly (and seemingly unwarranted). What is a stock of memes? And is the boom harmless or harmful to investors and the financial establishment?
GameStop shares took off after a “short squeeze”. When investors bet against a stock, they are “short selling” its stock, borrowing and reselling it, in the hope of buying it back for a lower price. If a heavily shorted stock starts to climb, like GameStop’s did, it can trigger a self-reinforcing cycle: shorts rush to buy back their stocks to hedge their positions, pushing the price up even more, prompting even more short sellers to buy back their stocks too. GameStop’s dizzying rise has helped the action go viral online, attracting the attention of even more retail investors. The price spikes of several memes stocks appear to be related to the amount of discussion about them on r / WallStreetBets, a forum on Reddit, a chat site whose users are known for their misdeeds. This is where the name comes from: an internet meme being an idea or behavior, usually humorous, disseminated via social networks.
Redditors get bloody noses at Wall Street short sellers. But many on Wall Street see no method in their folly other than the fear of missing out on already rising stocks. Bullish Redditors often cite vague future potential rather than concrete financial fundamentals for their choices. Not all of the stocks apparently boosted by Reddit were sold heavily. BlackBerry, a former smartphone maker, is one example. Young and inexperienced investors seem to predominate among those drawn to the craze. The rise of commission-free trading on platforms such as Robinhood and the growth of online investing communities on Reddit are generally blamed for the trend.
Managers at White Square Capital, a hedge fund, would surely scoff at the idea that the boom in memes stocks was harmless fun. He recently closed his main fund, which had recorded a double-digit percentage loss in January after betting against shares of GameStop. Financial regulators are looking to see if there is anything untoward about the volatility caused by the antics of Redditors. Last month, the United States Securities and Exchange Commission also said it was investigating “payment for order flow,” a controversial practice in which brokers derive their profits from routing retail transactions. towards market makers. This allows retail investors to be offered free stock trades, making it easier to buy into a frenzy of memes. But there is nothing new about unsuspecting investors cramming into the latest financial fad, as evidenced by the stock market booms and collapses from the 1720 South Seas bubble to the Wall Street crash of 1929. The share of retail investors in equity transactions fell from a quarter in 2019 to a third last year. Such outbreaks have rarely ended well.