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How GameStop Investors Took On the Wall Street Goliath, as Told by Twitter

Confused about GameStop? Let Twitter explain.

By Christy Bieber – Updated Feb 3, 2021 at 7:02AM EST

Buying stock is typically a carefully-researched decision based on the long-term viability of a company. In recent days, however, the hottest stock on the U.S. market was a struggling, brick-and-mortar video game retailer -- not exactly a business model that suggests explosive growth or even long-term viability. 

How, exactly, did this happen and why? Through a series of unlikely events, GameStop (GME +2.01%) became a "meme" stock, with small investors driving up the price by creating a big buzz on social media. 

Still confused? Since social networks helped send GameStop's shares skyrocketing more than 1,640% at its peak, why not let one of them -- Twitter (TWTR +0.00%) -- explain just what's going on. 

Investor looking intently at stock charts on his computer monitors

Image source: Getty Images.

Twitter explains GameStop

The GameStop saga all started in a Reddit subforum called r/wallstreetbets.

See, around a year ago, the founder of r/wallstreetbets published a book containing a warning for Wall Street. He cautioned that the industry's business model might not stand up to groups of retail investors who could harness the power of the internet to exploit weaknesses. 

And that's exactly what happened. Reddit users, who were bullish on GameStop, noticed a whole bunch of hedge funds had shorted the stock, meaning they made big bets on its price going down. 

Redditors decided to execute a "short squeeze," buying up stock and harnessing the power of social media to encourage others to do the same. 

As hordes of retail traders bought GameStop stock, the price of shares skyrocketed. 

Hedge funds had to cover their shorts by buying shares, which sent the price up further -- and Elon Musk amplified the whole thing.

Hedge funds started to suffer big losses, with some requiring bailouts.

The story took off, with even people outside of the financial world jumping on the bandwagon -- if not by buying stocks, then by cheering on what they saw as a takedown of Wall Street bigwigs by everyday people. 

Unfortunately, many people who jumped on the bandwagon and bought GME may not have been fully aware of the risk they were taking on -- which was a big one. Warnings flooded in about the volatility of the investment.

But people just kept buying.

And started expanding their purchases to other stocks they thought had potential to execute a similar short squeeze. 

As the stock price soared, however, some brokerages -- most notably Robinhood -- halted the ability to freely trade GameStop shares.

Robinhood got a lot of flack for this choice, most notably because it's an incredibly popular platform among the types of traders most likely to be participating in the GameStop frenzy. 

Lawmakers from both sides of the aisle also voiced their concern about why Robinhood stopped trading. 

It later turned out the broker may have halted trading because it couldn't afford to let people continue buy GameStop on its platform, due to certain Securities and Exchange Commission (SEC) rules.  

Of course, the SEC took notice. 

And some Wall Street insiders decided to make some changes. 

While this may all seem fun, a lot of regular people could end up suffering huge losses.

Which is why it's probably best to avoid taking stock advice from Reddit. 

Read Next

About the Author

Christy Bieber
Christy Bieber is a contributing Motley Fool retirement and Social Security expert covering retirement planning, 401(k)s, IRAs, and other personal finance topics. Christy has written about finance since 2008 and previously taught business courses at Bryant & Stratton College. She holds a law degree from UCLA and a bachelor’s degree in English, media, and communication with a certificate in business management from the University of Rochester. In law school, she earned three CALI Awards for Excellence for the highest scores in civil procedure and contract law exams.
TMFChristyB

Christy Bieber has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool recommends BlackBerry and The New York Times. The Motley Fool has a disclosure policy.

 

 

 

 

 

 

 

Stocks Mentioned

GameStop Stock Quote
GameStop
NYSE: GME
$24.37
(+2.05%)+$0.49
BlackBerry Stock Quote
BlackBerry
NYSE: BB
$3.44
(-3.24%)-$0.12
The New York Times Co. Stock Quote
The New York Times Co.
NYSE: NYT
$80.39
(-1.90%)-$1.56
AMC Entertainment Stock Quote
AMC Entertainment
NYSE: AMC
$1.17
(-3.72%)-$0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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