GameStop: How Reddit users made billions of dollars at the expense of US hedge funds
Video report by ITV News Correspondent Richard Pallot
Social media users on Reddit have clubbed together to make billions of dollars at the expense of US hedge funds and other big investors.
Thousands of normal traders on the Reddit forum r/WallStreetBets have helped drive up the price of US firm GameStop's stock price in recent days, which has caused a major problem for short sellers betting against the company who were hoping for the stock price to fall.
The video games company had been popular among hedge fund bosses and investors who thought the price of the stock would drop. Amid the pandemic, the closing of shops and the rise of digital sales, Wall Street investors were banking on the price of the shares falling.
That was until Redditors got involved.
Users on the forum have been coordinating plans to drive up the price of the stock.
Prices have skyrocketed and Redditors have been sharing memes, gloating about how they are making huge returns on their investments at the expense of big investors.
Many people have made a huge bet against gigantic financial institutions and are currently winning.
It now appears that two of the major trading apps, Freetrade and Robinhood, have paused trading on GameStop as shares of the firm surged 30% less than 45 minutes after the markets opened on January 28.
So how does it work?
GameStop's stock price has surged from around £13.15 ($18) at the start of 2021 to more than £253.51 ($347) on the date of publishing.
They bought the stock at low prices, and kept buying more to drive the price up, forcing something which is known as a "short squeeze" which drives up the price and empties out the hedge funds.
What is 'shorting'?
It's a bet that a company's stock will become less valuable. Essentially, investors sell shares of a stock at a certain high price in the belief in the future, the price of the stock will drop.
They will then buy the stock at a lower price to cover their shorts, closing the deal and earning the difference between the price they sold the stock at as profit.
Sometimes short sellers lose. This happens when they bet on a stock price to go down, but instead it goes up.
This analogy explains it.
However there is no limit to what short sellers could lose as stock prices could go up for ever - meaning there is no limit to what could be lost.
Who are the winners and losers?
The shorts are hurting the financial institutions.
Melvin Capital Management, a hedge fund betting against GameStop, is down 15% in the first three weeks of 2021, the Wall Street Journal reports.
A report from CNBC noted that Melvin Capital Management closed out its short on Tuesday January 26 and had taken out close to £2.2 billion ($3 billion) from two investment banks to keep itself afloat.
Meanwhile one trade on WallStreetBets claims to have turned $50,000 into $11 million from the short squeeze.
And the user who first pitched GameStop on Reddit, called DeepF******Value, made an original investment of (£36,528) $50,000. That is now worth £36.5 million ($50 million).
Billionaire Elon Musk, whose tweets can move stocks, tweeted "Gamestonk!!" with a link to the r/WallStreetBets.
What about the memes?
The Reddit forum describes itself "like 4chan found a bloomberg terminal".
Users have been sharing memes, mocking Melvin Capital Management and Citron who bet big against GameStop.
Could other companies follow suit?
It seems that legacy tech firms are the investment of choice for Redditors following the success of their GameStop investment.
Google Trends, which monitors search traffic on the browser, showed more than one million people searched Nokia stocks on Wednesday.
BlackBerry Stocks were searched more than 400,000 time on January 27.
Share prices of BlackBerry have also been on the increase since January. At the start of the year, stocks in the firm were trading at (£4.84) $6.63 and they are now at £18.34 ($25.10) and climbing.
Trading opens on Wall Street at 3pm UK time, so it will be interesting to see where these stocks go.