With the stock market being more popular than ever with sites like Robinhood or Acorns, millions of at-home retail investors surged to the stock market for an all-time short squeeze.
To the moon!
On January 25th, 2021 the investing world, both professionals and amateur stock brokers woke up to a shocking surprise. There was a gigantic spike in the stock prices for companies such as Gamestop (GME) & American-Multi Cinema (AMC). Gamestop’s stock price rose from around 40$ a share up to 483$ in a three-day period. With small retail investors putting in hundreds to thousands of dollars in these stocks the prices were soaring higher and higher. This rapid push was inspired by a Reddit subreddit called Wallstreetbets with about three million members that gathered its followers to use apps like Robinhood and Acorns to try and keep driving the price up and up. This is where everyone started using the term, “To The Moon!”. With everyone pushing their own capital into these stocks a serious problem arose for these large hedge funds and brokerage firms.
There has always been a large separation between your average, every day, investor and the large money-making hedge funds that do the trading for those with the means to hire them. However, with these new stock market apps, there have been more trading accounts opened in the past year than ever before. Since Robinhoods inception in 2014, the app has reached a user base of 13 million users as of 2020. With the means to invest in the market, these ordinary investors started to believe in the, “Get Rich Quick” possibility by throwing large amounts of money into the market.
Circumstances seriously changed when social media influencers and websites like Reddit started finding ways to get high-risk high reward stocks in front of these new investors. One example is from TikTok, where users are finding themselves on StockTok. This is where influencers are generating various TikTok videos about their ‘hot stock’ of the week and getting it in front of these small-time investors’ eyes.
The great hedge fund war
With the added benefit of social media coverage, the time was ripe to strike with full force. Soon enough there was an all-out war on the market with ‘Average Joe’ investors battling large hedge funds for control of these stock prices. Melvin Capital, a large hedge fund, was the primary investor in the shorting of Gamestop stock. Shorting a stock is making a bet that the price of the stock will go down rather than up. Their investment strategy saw the downfall and potential bankruptcy of Gamestop, so the company saw profit in shorting the stock. Melvin made the decision to bet against the stock and had the largest short position on Gamestop with around three billion dollars.
When Reddit and TikTok users got wind of this short they thought they found a way to actually get rich quickly. There were more shorts bets on the company than Gamestop had shares to sell. Influencers noticed quickly and saw that they could take advantage of these hedge funds’ positions. With influencers telling their followers to buy Gamestop and send it “to the moon” companies like Melvin grew increasingly nervous. The price of Gamestop kept going up and up due to these retail investors. When the price kept skyrocketing more and more retail investors wanted to get in on the action. This is where influencers started getting people to squeeze those shorting the stock out of their position and send the stock price “to the moon”. Companies like Melvin became increasingly concerned since their position was losing money, and fast, so they were forced to sell their short positions and buy the stock back to save what money they could. This influx of activity drove the price closer to the moon. The Robinhood and Acorns investors had unlocked a newfound power, to force rich hedge funds to essentially succumb to their will. This was only the first battle, the war has only just begun.
Related: Reddit Investors Take On Wall Street
Is this legal?
The question now, is this actually legal? Hedge fund investors have spoken out about this sort of “pump and dump” style of investing, saying there are legal problems with these small-time investors putting money into whatever they’d like to drive prices. The only thing is, this is totally legal. There have been television shows like Mad Money and even investor seminars and conferences that essentially do what these social media influencers have been doing, simply by telling investors where to put their money. The only possible illegal activity comes from the app Robinhood itself. On Jan. 28th Robinhood announced they would restrict trades and only let people get out of their positions on stocks such as Gamestop and AMC. In this free market economy, this comes as a surprise to everyone using the app. How is it possible to not trade on the market when it is open to everyone?
Hold the line!
Since Robinhood blocked these retail investors from purchasing stocks, influencers have been promoting less restricted investing websites and apps like Schwab and Webull to continue the rocket ‘to the moon’. Robinhood has even received flak for its name, a name that insinuates giving to the poor and taking from the rich, however, they have just let the rich get their money back. All over social media, stock influencers are telling their followers to hold the line and find ways to continue this historic surge in the market. By staying in these positions, however, these retail investors will lose serious amounts of money depending on their position. Holding the line means waiting out Robinhood and other restricted trading platforms until they let the retail investors trade freely once again, as it should be in a free and open market.