Day traders gambling stock, sends GameStop prices surging
r/wallstreetbets founder talks GameStop stock surge.
NEW YORK (KLKN) — A popular forum on Reddit was enough to shake the stock market, leaving Wall Street in fear of a stock bubble.
A group of small day traders is playing the stock market odds, investing in companies that Wall Street professionals believe will fail. The day traders will encourage each other to buy stock in these companies causing the price to surge, then they cash out for a profit.
The 2.5 million follower forum, r/wallstreetbets, focused on the video game store GameStop this week.
The result? Overnight, GameStop’s stock skyrocketed, with shares up 1,7oo% this month.
To put that into perspective, a year ago, GameStop was worth $4 a share. As of Tuesday, it was worth nearly $150 a share.
In addition to earning a bit of profit, these day traders are raising these underdog stocks in an act of rebellion against hedge fund managers.
Some hedge fund managers will short stock by borrowing shares from a failing business, promising to purchase it at a later date at whatever -cheaper- price it is trading at then.
By inflating these stock prices, Reddit traders have caused a massive headache for professional investors who are now having to buy it back.
Experts attribute no-fee trading sites, like Robinhood, for democratizing investing and giving smaller traders more power.
However, as of Thursday morning, Robinhood has restricted further trade on GameStop stock, causing an uproar in the day trader community.
But GameStop isn’t the only business r/wallstreetbets is looking at. Wednesday, they bid up the price of movie-theatre chain AMC 200%.
Analysts warn people to stay away from this trading style, as the inflated stocks will likely crash as quickly as they have risen.
Author of “The Wolf of Wall Street,” Jordan Belfort, commented “You have to be really, really careful. I think you could actually make a lot of money and I have friends that are making a ton of money playing these hot Reddit stocks and just being pumped up, it’s truly it’s a modified pump and dump because at the end of the day, it will most certainly go back down because it’s not trading based on any rational, fundamental value.”
Wall Street leaders are now asking for an investigation into possible improper actions, bringing in White House regulators into the conversation.
White House Press Secretary Jen Psaki has confirmed their economic team are monitoring the situation.
“The SEC and NC are playing catch a ball, they’re always trying to figure out ‘how do you stop it’?” said Belfort. “So eventually they will do something here and they’ll come up with some laws are circuit breakers that don’t allow this to happen, but that could take three to six months. It will eventually, I believe, stop as it should.”
Overall, experts are cautioning young adults against trading to gamble, rather than to invest. It can be incredibly risky, leading some to lose their life-savings or college funds.
NYU Marketing Professor Scott Galloway told ABC News, “I would approach it the same way you approach it going into a casino, and that is you’re not investing, you’re gambling… And the history of people building economic security through this type of trading activity is pretty rare.”