Reddit sent shares of AMC and GameStop to the moon. Why and what happens now

In recent months, several Reddit users have worked to increase the stock price of video game retailer GameStop, despite Wall Street investors betting the company will go bankrupt. So far, they have won, increasing shares by more than 10,000% (you read that right.) Then they started spreading their strategy to the AMC film network as well. And it worked. In their wake, these online market players brought down Wall Street, creating drama full of memes and strange internet language since big investors can lose billions of dollars.

It’s a crazy story, complete with cameos from Tesla CEO Elon Musk and CNBC financial commentator and former hedge fund manager Jim Cramer. There is even Michael Burry, one of the themes of the book and film The Big Short, who happens to be a prominent investor in GameStop. It’s wild.

Despite the change being characterized as “crazy” and a “Ponzi scheme”, GameStop’s shares have become the battleground of an epic war between Wall Street and Internet marketers, with almost everyone waiting for it almost all of them hoping to fail. The questions are when and who will lose.

“We are seeing a phenomenon I have never seen,” said Jim Cramer, CNBC’s Wall Street commentator and former hedge fund manager, during a segment on Monday. And GameStop may be just the beginning. “It’s insane.”

It all started last week, when posters in the Reddit r / WallStreetBets stock trading chat community increased the shares of the game retailer. With much of Wall Street’s bet against GameStop’s success, WallStreetBets investors believed they could force a market recovery creating demand where before there was little.

As a result, GameStop’s shares jumped more than 822%, from $ 17.25 per share earlier in the year to a rise of $ 159.18 on Monday. Then it fell almost in half, only to rise again to $ 147.98 on Tuesday. And then Musk tweeted about it to his 43 million followers (using that strange internet vocabulary, of course), and the price rose 40% in the negotiations after the exchange closed. On Wednesday, it closed at $ 347.51 a share, before falling back into trading after the stock market closed.

The Reddit community also turned its eyes to the BlackBerry, trying to do the same. So far, they have increased their shares more than double $ 6.58 per share when they started earlier in the year. On Tuesday, the stock closed at $ 18.92. On Wednesday, it closed the normal trading session at $ 25.10.

There is also AMC. Reddit took aim at that, generating the hashtag #SaveAMC on Twitter as well. Its shares jumped from $ 2 per share last week to close trades at $ 19.90 on Wednesday. He also fell into business after hours.

Here’s what you should understand about GameStop, AMC and BlackBerry.

How did this happen?

Indeed, the WallStreetBets crowd realized that Wall Street made a big mistake. People known as short sellers, who bet GameStop’s stock would fall, were too aggressive.

The WallStreetBets gang realized that if it could create an artificial demand for GameStop shares with its own money, it could force Wall Street to recalibrate its bets, further raising prices. And some investors who couldn’t even bet against GameStop would have to pay even more.

As of Wednesday, there were 3.8 million members in the WallStreetBets community, although it is almost impossible to determine how many people are involved in the GameStop, AMC and BlackBerry schemes.

What we do know is that all of this activity seems to have created a “short squeeze”, in which short sellers who bet against GameStop are forced to buy more GameStop shares to cover their losses. This pushed the price up even further, which forces more short sellers to cover their losses, which further raises the price. Some Reddit members believe that GameStop’s shares can reach thousands of dollars just because of this mechanism.

And that is why we are suddenly seeing the value of GameStop jump.

See too: The increase in GameStop shares was driven by the slang of Reddit’s WallStreetBets community. Here’s what it means

How does this short sale work?

When people buy a stock normally, they are betting that it will increase or divide enough profits to make more money than they invested.

Short sellers, or shorts, do the opposite. Short selling deals with borrowed stocks and sells them, in the hope that they can make money if the stock goes down in the future.

Imagine Ian Corp. is a public company and its shares are worth $ 10. A “sold” would borrow shares from Ian Corp. and sell them for $ 10. Their bet is that Ian Corp. shares they will fall below that – maybe to $ 4. If that happens, they can buy the stock for $ 4 and pocket the other $ 6.

If the shares of Ian Corp. jump to $ 25, the lender who made that bet possible can push the sale to cover your bet. This would mean that the seller would effectively have to buy the shares at the new and higher price.

When a bet is certain, betting against a company, they can win big money. But if they are wrong, they can also lose a lot more money.

There are other options and tools to bet against a company’s future as well.

How much money did GameStop shorts lose?

The losses appear to be enormous. On Monday, short positions appeared to have lost $ 3.3 billion in bets against GameStop this year, according to MarketsInsider. About $ 1.6 billion, or about half, of those losses came on Friday, when stocks jumped 51%.

It is also important to note that GameStop started the year as one of the most shorted companies in the market.

That looks like a lot of money

Yes, but what is perhaps an even greater indication of how dramatic these moves were, GameStop’s stock sales were interrupted during Monday’s trading because they were moving too fast.

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These wild swings aren’t going to go on forever, are they?

Part of what motivated this behavior is the popularity of retail investments, or when non-Wall Street traders buy and sell stocks. Stock trading apps, often free of charge, have made it easier for people to enter the market. And social media has helped people come together, encouraging each other to buy more and more shares.

“GameStop’s recovery is one of a series of attractive market moves to raise concerns among fund managers, some of whom say trading by individual investors is pushing stock prices out of fundamentals,” wrote Wall Street Journal on Monday.

How is Wall Street responding?

Big name trading apps like Robinhood, ETrade and others would have struggled to stay online amid all the hysteria. TD Ameritrade on Wednesday acted to restrict the sudden spikes in demand, “for being too cautious amid unprecedented market conditions.”

Nasdaq said it will halt stock trading if it finds a link to unusual social media activities. The company said it sees its role as a “self-regulatory organization” of ensuring that its markets operate in a “legitimate” manner. “Regulators kind of need to keep up with the technology that is now available,” Nasdaq CEO Adena Friedman told CNBC on Wednesday.

What do companies think of all this?

GameStop did not respond to a request for comment. BlackBerry executives told MarketWatch that they “were not aware” of any reason for the recent commercial activity. BlackBerry reached an agreement with Facebook earlier this month over a patent dispute, although the terms were not disclosed.

Why are Redditors doing this?

There is the seemingly easy money aspect, which is attractive in itself, if you are comfortable with the risk. But some of them are also framing it as a crusade against Wall Street. “We are in a war,” posted a Redditor on Wednesday. “A war for the redistribution of wealth.”

You promised me Elon Musk, how is he involved?

In addition to being a prolific Twitter user, Musk has also recently discovered that he can direct people to the actions of various companies. He tweeted about how much he liked buying something for his dog on Etsy, and the stock skyrocketed. Now he tweeted about GameStop, causing more excitement.

That sounds crazy

This is. And just watching makes your head spin. For example, on Wednesday night, the popular chat app Discord banned the WallStreetBets community from its service for violating its rules against hate speech and glorification of violence. Apparently, some of the most unpleasant elements in the community had repeatedly broken Discord’s rules.

At the same time, the group responsible for the WallStreetBets Reddit community prevented anyone else from entering, effectively making everything private.

This seemed to frighten investors, who suddenly caused GameStop and AMC shares to drop more than 30% each in after-hours trading.

A little over an hour later, the Reddit community was publicly available again, the inhabitants had created a new Discord chat group and GameStop and AMC’s shares were recovering from their sudden downturns. If you hung up the phone to watch a movie before it happened, you may never have noticed when it was over.

Except that you must have seen Elon Musk tweeted about how Discord was no longer cool.

Okay, what about the Big Short guy?

Michael Burry himself is an interesting subject. He was famous for betting against the real estate market before the start of the great recession around 2007 and 2008. He invested in GameStop, but he also said he believed that all of this behavior was “unnatural, insane and dangerous”.

Of course, some of the Reddit members say that they see this battle on GameStop as their Michael Burry moment, making it much more interesting.

Should I try to get into the frenzy?

It is always good to consult a financial professional before making investment decisions.

Correction on January 25 at 17:52 PT: The explanation of short selling has been corrected to make it clear how the process works and that there are different ways to bet against the rise in a company’s stock price.