GameStop saw its stock skyrocket on Wednesday after discussions
on social media platform, Reddit, prompted a buying frenzy. Hardly able
to keep up with digital downloads even before the onset of the coronavirus pandemic,
GameStop stock prices rose to $347 per share. According to a report in The
Hill, they were trading at $17 at the start of the year, recording a rise of
over 1,800% in January.

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With nearly
three million members, buys from the Reddit community r/WallStreetBets (WSB) have
caused a similar rise in stock prices for a number of companies. Shares of
theatre chain AMC rose 302%, Blockbuster Videos’ holding company’s stock rose
120%, Nokia rose 38% and BlackBerry surged 33.4%.

Most of
these companies do not have a very bright future, however, they have become the
favourite targets for a large number of self-starting traders using apps such
as Robinhood.

WSB’s
trading community has blossomed since the coronavirus pandemic. According to
one of its moderators, the subreddit was viewed 300 million times in March,
increasing from 30 million in December 2019.

“It’s
gotten a lot busier very, very quickly,” the moderator OPINION_IS_UNPOPULAR told
The Hill. “And these past few days, especially, are absolutely game-breaking.”

And GameStop,
which went private for a short while on Wednesday evening before opening up
again, is their primary target.

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Some Reddit
users had projected back in September 2019 that the company’s stock was being
undervalued, as well as recognising the fact that several hedge funds had been
betting against it using a tactic called short-selling, which is a bet that a
certain stock’s price will plummet.

The
strategy gained traction last year, with Redditors going on to buy large numbers
of the stock and holding on to it, which forced the hedge funds that had
shorted the stock into something called a short squeeze.

Short
squeeze is a tactic investors use to force short sellers of a particular stock
into a vicious cycle of losses by causing the price of the stock to shoot up. With
more investors buying the shorted stock, short sellers are forced to buy shares
to fulfill contracts, which further drives the share prices higher.

Many of the
users, including both professional financial analysts and people investing as a
hobby, are betting that the stocks will continue to rise.

The WSB
moderator has said that the team has been coping with trying to inform the tide
of new users about the potential risks of investing.

“It seems
like some people are taking much bigger risks than they can afford,” they said.

It remains
unclear how long can the WSB-driven rise can go on for, and what will stop it,
with Washington and Wall Street paying close attention.

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Treasury
Secretary Janet Yellen is keeping a close tab on the situation, the White House
said on Wednesday, with Federal Reserve chairman Jerome Powell sidestepping
questions about the share prices during a presser.

In a
statement, the Securities and Exchange Commission (SEC) said it was monitoring
the “on-going market volatility in the options and equities markets and,
consistent with our mission to protect investors and maintain fair, orderly,
and efficient markets, we are working with our fellow regulators to assess the
situation and review the activities of regulated entities, financial
intermediaries, and other market participants.”

Some experts
believe those involved in driving GameStop’s prices sky-high could face legal
action.   

“This looks
an awful lot like market manipulation, and I suppose it could rise to the level
of securities fraud,” a securities lawyer in Washington said.