Reddit sent AMC and GameStop stock to the moon. Why, and what happens now

Reddit sent AMC and GameStop stock to the moon. Why, and what happens now

Wall Street bet against GameStop, and online investors saw an opportunity. Now they’re all playing a game of chicken with billions of dollars on the line.

Over the past few months, a bunch of Reddit users have worked to push up the value of shares for video game retailer GameStop, despite Wall Street investors betting the company will fail. So far, they’ve won, pushing the stock up more than 10,000% (you read that right.)

Then they started spreading their strategy to struggling movie chain AMC, too. And it’s worked. In their wake, these online market players have upended Wall Street,

creating a drama filled with memes and weird internet lingo as big-time investors stand to lose billions of dollars.

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

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Despite the move being characterized as “insane” and a “Ponzi scheme,” GameStop’s stock has become the battleground of an epic war between Wall Street and internet traders, with nearly everyone expecting it nearly all of them expecting it to fail. The questions are when, and who will be on the losing end.

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

It all started last week, when posters on the Reddit stock trading chat community r/WallStreetBets pushed up shares in the struggling game retailer. With much of Wall Street betting against GameStop’s success, WallStreetBets investors believed they could force a market rally by creating demand where there had been little before.

As a result, GameStop stock jumped more than 822%, from $17.25 per share at the beginning of the year to a high of $159.18 on Monday. Then it dropped by nearly half, only to rise back up to $147.98 on Tuesday. And then Musk tweeted about it to his 43 million followers (using that weird internet vocabulary of course),

and the price jumped 40% in after-hours trading. On Wednesday, it closed at $347.51 per share, before dropping again in after-hours trading.

The Reddit community has also turned its eyes on BlackBerry, attempting to pull the same trick. So far, they’ve pushed shares up more than double from $6.58 per share, where they started at the beginning of the year. On Tuesday, the stock closed at $18.92. On Wednesday, it closed regular trading at $25.10.

There’s also AMC. Reddit targeted that one, spawning the hashtag #SaveAMC on Twitter too. Its stock jumped from $2 per share last week to close trading at $19.90 on Wednesday. It too fell in after-hours trades.

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

How’d this happen?

Effectively, the WallStreetBets crowd realized Wall Street made a huge mistake. People known as short sellers who were betting GameStop stock would fall had been too aggressive.

The WallStreetBets crowd realized that if they could create artificial demand for GameStop shares with their own money, they could force Wall Street to recalibrate its bets, pushing prices even higher. And some investors who couldn’t even back up their bets against GameStop, would have to pay even more.

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

What we do know is that all this activity appears to have created a “short squeeze,” where the short sellers betting against GameStop are being forced to buy more GameStop stock to cover their losses.

That pushed the price up even more, which forces more short sellers to cover their losses, which pushes the price up even more. Some of the Reddit crowd believe that GameStop stock could reach into the thousands of dollars just because of this mechanism.

And that’s why we’re suddenly seeing GameStop’s value jump.

How does this short selling work?
When people buy a stock normally, they’re betting it’ll rise or share enough profits that they’ll make more money than they put in.

Short sellers, or “shorts,” do the opposite. Shorts trade with borrowed shares and sell them, with hopes they can make money if the stock falls in the future.

Imagine Ian Corp. is a public company, and its shares are worth $10. A “short” would borrow shares of Ian Corp. and sell them for $10. Their bet is that Ian Corp. stock will actually drop below that — maybe to $4. If it does, then, they can buy the shares at $4 and pocket the other $6.

If Ian Corp. stock jumps to $25, then the lender who made this bet possible may push the short to cover their bet. That would mean the short effectively has to buy the shares at the new, higher price.

When a short is right, betting against a company, they can make a lot of money. But if they’re wrong, they can lose a lot more money too.

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

How much money did the GameStop shorts lose?
The losses appear to be tremendous. As of Monday, shorts seemed to have lost $3.3 billion betting against GameStop this year, according to MarketsInsider. About $1.6 billion, or about half, of those losses happened on Friday when the stock jumped 51%.

It’s also worth noting that GameStop began the year as one of the most shorted companies on the market.

That seems like a lot of money
It is, but what’s perhaps an even bigger indication of how dramatic these moves were, GameStop share sales were halted during Monday’s trading because they were moving too fast.

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These wild swings won’t continue forever, will they?
Part of what’s driven this behavior is the popularity of retail investing, or when traders who aren’t Wall Street professionals buy and sell stocks. Stock trading apps, often with no fees, have made it easy for people to jump into the market. And social media has helped people to rally together, egging one another on to buy more and more of a stock.

“GameStop’s rally is one in a series of eye-catching market moves to stir concerns among fund managers, some of whom say trading by individual investors is pushing stock prices out of whack with fundamentals,” the Wall Street Journal wrote Monday.

How’s Wall Street responding?
Big name trading apps like Robinhood, ETrade and others have reportedly struggled to remain online amid all the hysteria. TD Ameritrade on Wednesday acted to restrict the sudden spikes in demand, “out of an abundance of caution amid unprecedented market conditions.”

Nasdaq said it will halt trading on a stock if it finds a link to unusual activity on social media. The company said it sees its role as a “self-regulatory organization” is to make sure its markets act in a “legitimate” way. “Regulators kind of have to catch up with the technology that’s now available,” Nasdaq CEO Adena Friedman told CNBC on Wednesday.