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Why GameStop Stock Soared As Part Of A Reddit Forum's Quest To Take Down Hedge Funds

The meme stocks came for Wall Street, and hedge funds lost billions of dollars.

A David and Goliath fight is being waged in the stock prices of seemingly failing businesses like GameStop and BlackBerry.

In this case, Goliath is a group of Wall Street hedge fund investors and David is an online community of individual investors who frequent Reddit and TikTok looking to stick it to the man.

Stocks for previously floundering companies like video game retailer GameStop, movie theatre company AMC and original smartphone company BlackBerry have skyrocketed exponentially this week after being bought up en masse, largely by users of the Reddit forum r/WallStreetBets. This has thrown the stock market into chaos, hedge funds are pulling out their investments and really, GameStop hasn’t received this kind of attention since the Nintendo Wii came out.

According to his spokespeople, even U.S. President Joe Biden is monitoring the “GameStop situation” — a funny phrase for the U.S. president to say — closely.

But what is actually going on with the stock market and how did a ragtag bunch of meme-lovers on the Internet cause so much drama? Many people, including myself, might meet most stock market news with confusion, ignorance or an ironic declaration of “STONKS.” But stocks do have an impact on our day-to-day lives, and we’re seeing that in real time right now — all thanks to Reddit.

Here’s what you need to know.

What is r/WallStreetBets?

It’s a Reddit forum where small-scale investors gather and speculate on stocks. The group describes themselves as “Like 4chan found a Bloomberg Terminal” and currently boasts over 4.2 million users. They also had an accompanying server on voice-messaging service Discord, which for a while this week sounded like the honest-to-goodness stock market.

The Reddit forum briefly went private Wednesday night following this week’s mayhem, and the Discord server has been shut down due to an influx of inappropriate speech, according to its owners.

What is a hedge fund?

A hedge fund basically refers to an investment partnership that invests more aggressively and freely than most mutual funds, usually involving individuals with high net-worths and institutional investors. Hedge fund managers tend to engage in risky practices like short-selling or shorting, with the hope of making huge profits off declining stocks.

What does shorting mean? What’s a squeeze?

Usually, buying a stock comes with the hope it will go up in value. You invest in a company on the rise, and make a profit.

But shorting refers to borrowing and selling into a stock with the prediction that it will continue to decline, so you can rebuy it. For example, a hedge fund investor borrows a stock at $50, immediately sells it at that price, and then rebuys it at $30 to return the loan and pocket the $20 difference.

The movie “The Big Short” is all about shorting and the 2008 financial crisis.

WATCH: “The Big Short” and five other best movies about money and Wall Street. Story continues below.

Shorting can be risky though, because if the stock rises in price, when you return it, you have to pay the difference back, too. And that’s what’s happening to hedge fund managers with GameStop and others right now.

A short squeeze refers to what happens when the stock goes back up. Short sellers have to buy into a rising market, which means more people are buying which pushes prices up even more. Basically, when the Redditors pushed GameStop’s stock up, all the hedge funds rushed to exit and sell off their shorts before losing too much money.

Why GameStop?

GameStop (GME) has been identified by hedge fund investors as a good short opportunity, as a stock in decline with no sign of rising anytime soon. The once-thriving retail video game brand has been hit hard by the rise of online gaming. The company’s brick and mortar stores have struggled even further in the pandemic.

A few months ago, Reddit users, upon seeing this hedge fund interest, decided it was the perfect company to buy stocks en masse and gut the hedge funds who had been short-selling it. It also was a “memey” stock in the sense that a video game store was the perfect place for a bunch of online investors to put their money.

A sign outside of GameStop location in the United States.
A sign outside of GameStop location in the United States.

Led by users including an influencer who goes by the username DeepF**kingValue, the Redditors bought shares and refused to sell, just as hedge funds started to see the prices increase and rushed to cover their short stocks.

GameStop’s share price skyrocketed. At the start of the 2021, GameStop was trading for less than $20 a share — on Wednesday it hit nearly $400. Users on the forum are still encouraging each other to hold onto their stocks and not sell, in order to keep the price going.

But GameStop’s not the only one. The Redditors have identified other companies targeted by shorting hedge funds, from BlackBerry (BB) to the AMC Movie Theatre chain, and bought those too, leading to their own inflated prices.

There are good memes that explain all of this, right?

Oh you better believe there are some quality memes that came out of all of this. And if all that stock mumbo-jumbo is hard to keep track of, the memes honestly do a pretty good job of summarizing the situation.

Even Canadian band Arkells got in on it.

What happens when the GameStop game stops? Who’s making money here?

Definitely not the hedge funds. According to research firm S3, as of Thursday morning short sellers have lost $5 billion on GameStop so far this year. At least two have been completely wiped out.

Many Redditors are reporting huge profits if they did sell their stocks, including being able to put a down payment on a house.

However, it can’t go up forever. Bubbles like this end in crashes and many Reddit investors will likely be left with holes in their wallets from the money they invested. For now, though, they’re invested in holding the line.

On Thursday, trading app Robinhood restricted trading on certain shares, including GameStop and BlackBerry. Robinhood said trading in the affected shares will be limited to traders looking to close out their positions. That means shareholders can sell and shorts can buy them to cover their positions, but any other type of trading is currently restricted.

On the Reddit forum Thursday, users are encouraging each other to use other means to buy, and to “hold the line.”

“To everyone who is nervous: Wall Street is worried. Some of these people are losing A LOT of money because of us. These are people that never cared for those of us struggling. These are people that have 4 homes valued in the millions of dollars. They drive Lambos,” user tsnuamighost wrote Thursday morning.

WATCH: Here’s why Robinhood is restricting users from buying surging stocks. Story continues below.

“If you let them scare you, you will lose out on your money and we lose out on ours. We will be in worse positions and they will continue to be rich.”

And as of Thursday morning, the international cohort of Reddit investors is continuing to invest — including from Canada.

“AMERICANS CAN’T BUY GME, BB?!?! HELP IS ON THE WAY!! CANADIANS!! WE HAVE NO SUCH RESTRICTIONS!! BUY ALL THE GME AND BB YOU CAN!!!” user SubstantialTent wrote.

“Not just Canadians!! The whole world is coming to help now!! … WE ARE A GLOBAL FORCE TO BE RECKONED WITH!!! HOLD MY BROTHERS AND SISTERS!”

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