The recently released movie “Dumb Money” narrates the events related to GameStop in early 2021. This story became a symbol of a new era in investing, where social networks and communities, such as Reddit, can influence financial markets.
The “Short Squeeze” Mechanism
Hedge funds profit from falling stock prices by short selling borrowed stocks with the intention to buy them back later at a lower price. When retail investors began to buy GameStop shares en masse, their price sharply increased. This forced hedge funds, which had short positions, to buy back the shares at high prices to stop their losses, further accelerating the rise in share prices.
Role of Retail Investors and “Roaring Kitty”
Retail investors, united through forums like Reddit’s r/wallstreetbets, began buying and holding the shares, despite price fluctuations. This “hold and not sell” strategy helped maintain high demand and share price. An investor known as “Roaring Kitty” became one of the symbols of this movement, influencing the decisions of numerous retail investors.
Context of the Story
Before this event, hedge funds often practiced short selling of shares of companies they considered overvalued or outdated. This often led to exacerbating financial problems for such companies, including bankruptcy. However, in the case of GameStop, retail investors were able to mobilize sufficient capital through social media to counter this strategy of the hedge funds.
Changes on Wall Street
This case demonstrated that Dumb Money can no longer be underestimated and that Wall Street now has to consider the activity of retail investors in social networks as a significant factor. It shows that market power is not exclusively in the hands of large institutional investors.
The events around GameStop exposed the complex dynamics of modern financial markets, where a combination of technology, social media, and collective actions of retail investors can have a significant impact. This case has been a lesson for all market participants about the importance of transparency, information accessibility, and that even small investors can play a key role in the world of big money.