What Went Down: Social Media & Investing
What went down (or really what went up) on Wall Street last week was completely unprecedented. Stocks of flagging companies such as GameStop and AMC Entertainment have soared to unfathomable heights — the former seeing a 52-week high and low of $483 and $2.57 respectively. The fact that this market stunt was pulled off by a dynamic group of investors on Reddit makes it even more unbelievable. The Reddit page infamously known as “r/wallstreetbets” has launched a societal vendetta against hedge funds and Wall Street whales that were unfortunately shorting GameStop and AMC Entertainment.
One hedge fund in particular, Melvin Capital, lost 53% in January alone due to its position on GameStop. If you look at the Reddit page today, you will see the market moves happening in real time. These Reddit investors plan on taking stocks to the moon, stopping at absolutely nothing. This new market force propelled itself to the top of SEC’s watchlist, and potential allegations of fraud are being investigated today. Wall Street is still in shambles, and many investors — from retail to portfolio managers — are left scratching their heads. They knew of social media and its capabilities but could never imagine it being such a disruptive force in capital markets.
Although we do not plan to bore you with investing jargon, there is one phenomenon we believe is important in understanding how “worthless” stocks penetrated the stratosphere: the short squeeze. Shorting a stock basically involves selling a borrowed security and buying it back hopefully at a lower price. Investors are anticipating that the stock price would fall, and with it, they can make a decent profit. However, shorting a stock runs the risk of a price surge which would inevitably lead to an incalculable loss. These were the bearish risks hedge funds were taking on Wall Street, and some, who shorted companies like GameStop, paid very dearly. It is profound to think that a collective investing strategy on reddit single-handedly caused a price surge, and you would be right. When hedge fund managers initially saw the rise in GameStop’s value, they needed to make up for these losses by buying back its shares — a ton of them! With the increase in trading volume and Redditors adamant on holding their positions, the price of these stocks went up, up and away. Many trading platforms, such as Robinhood, could not authorize stock orders for GameStop, and many resorted to setting a minimum buying cap and even suspending trading. The rest is history.
So, what’s the future for social media in the world of investing? Should analysts ditch the fundamentals of value investing and simply scour the internet for the latest stock tips? Are hedge funds a thing of the past now?
There are so many questions and possibilities that surround social media’s influence on the stock market. Redditors and retail investors will remember this week as a time when they got back at the whales that caused the great financial crisis of 2007 to 2008. Wall Street will remember this week as a time when stocks have once again defied all expectations. People will call it how they see it.
Check back in next week for our new series, “What Went Down This Week” — exclusively on UBS LinkedIn.