Should you invest in GameStop because Reddit tells you to?
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Updated January 29, 2021
Social media platforms are a hub for hot money takes. Influencers on TikTok are spreading money myths, like The Fed having secret million-dollar accounts for every American (it doesn’t). Elon Musk tweeted about taking Tesla private at $420 a share (he didn’t), spiking the stock price.
Now Reddit, a community and content-driven platform, is moving the market. A group of investors are using the platform to drive up the share price of GameStop, a brick-and-mortar video game retailer.
Hearing that investors were shorting GameStop seriously ticked off Reddit investing group r/WallStreetBets. Investors in the group believe GameStop is worth investing in, so they started buying stock and spiking share prices to spite short sellers, who have essentially been betting share prices will go down. When stock prices rise, short sellers feel pressure to buy stock and even out their losses, said Tim Ranzetta, co-founder of Next Gen Personal Finance.
As a result of this activity, GameStop closed on Monday, Jan. 25 at $76.79 per share and jumped to $147.98 on Tuesday. It briefly crossed $450 a share on Thursday before closing at $193.60. For context, GameStop closed at $18.84 per share in 2020. These activities rallied GameStop’s stock 680% in January alone.
GameStop did not immediately respond to an email seeking comment.
To really understand what all this means, we have to look at the full picture. Short sellers have been betting against GameStop for a while and making significant gains doing it. That’s because GameStop, like many brick-and-mortar retailers, has been losing money. Short selling is when an investor borrows a stock, sells it, then buys it back, ideally at a lower price, and returns it to the lender. This became a losing bet after r/WallStreetBets GameStop chatter caught fire on Reddit, initially spiking stock prices on Jan. 22. That day alone short sellers saw a market-to-market loss of $1.6 billion. On Monday short sellers lost $917 million, according to S3 Partners data reported by CNBC.
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The page r/WallStreetBets was banned from Discord, an instant-messaging app, on Wednesday for “including hate speech, glorifying violence, and spreading misinformation,” according to a statement from the company. Moderators of r/WallStreetBets briefly made the Reddit page private on Wednesday to help manage what’s being posted. On Thursday Robinhood, an investing app, suspended all GameStop trading on its platform. It also restricted trading for other stocks that recently caught fire, including BlackBerry, AMC Entertainment and Bed Bath & Beyond, according to a statement from Robinhood. The app lifted some of those restrictions Friday allowing limited trading of the securities it initially restricted.
GameStop stock has enough hype to be officially dubbed a meme stock — a trendy stock that gains traction online and is usually popular among millennials.
Even if social media makes a stock look like a good investment, it’s important to know what you’re getting into, said Dan Egan, Managing Director of Behavioral Finance and Investing at Betterment.
“Social media has caused the ‘memeification’ of investing, but ultimately, this is just a short-term game to be played that produces winners and losers,” he said. “One of the biggest concerns is newer investors seeing a ‘hot’ stock, but not fully understanding the ramifications of investing in it and producing serious risk.”
Meme stocks can generate a lot of money if you already own the stock or get in at just the right time, “but it’s the people who get in late that get burned the most,” said Ranzetta.
This type of “hot stock” trading isn’t new.
“This is penny stock behavior occurring on an established U.S. stock exchange,” he said. “The pendulum swings between fear and greed, and clearly this specific stock is in greed mode — watch out below for when people look to lock in profits.”
Even if GameStop’s momentum holds, there’s no way to determine when investors may lose interest and look for the next hot stock, he added.
It can be hard to distinguish which trending stock is a fad and which will stick, said Lex Sokolin, co-head of global fintech at ConsenSys, a blockchain software company.
“Sentiment and fashions are hard to predict, and are separate from secular trends or financial performance. It’s like eating candy and getting a cavity,” he said. “If this investment community can also become customers of the digital business, then the value will be permanently accruing to GameStop. If we are only seeing a meme, it may expire over the long run.”
If GameStop inspires you to get into the meme stock game, make sure you’re playing with money you’re willing to lose, said Ranzetta.
“When you're putting your hard-earned money into an individual stock because you read about it on a social media post and the momentum seems to be positive, just understand that's speculating and not investing.”
Image: GettyImages / M Studio Images
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