When the pandemic first started, GameStop and other companies struggled due to the COVID-19 lockdown. Because of the lockdown, many individuals gathered together in a Reddit chat room to talk about stocks to buy. GameStop was originally valued at 1.2 billion before its value skyrocketed to 21 billion. By January 27th, 2021, GameStop shares had soared about 1,700%, and by the end of January, billionaire companies suffered from losing mass amounts of money.

The Reddit stock chatroom was founded in 2012 and has 4.2 million users. GameStop’s stock market prices were already low because GameStop hasn’t made substantial profit since 2017 and has had to close more than 1,000 stores. Some 2.4 million Redditors decided to purchase the GameStop stocks on a free app known as Robinhood. Robinhood is an online app that allows people to trade stocks commission-free, allowing many people to buy a fraction of a share for less money. 

These investors earned more money in a week than the stock market would grow in decades. With GameStop’s stock rising, Blackberry rising 290%, and AMC 80%, the hedge funds who have been short squeezing GameStop stocks were going to suffer. With the Reddit group buying the GameStop shares, the hedge funds began losing millions of dollars. 

This originally started with hedge funds, which are organizations whose primary goal is to make big profits through smart investments with the capital given to them by many different investors. They try to do this through different economic practices, the most important being short selling. Short selling is when people, like hedge funds, try to turn profit by selling stock they already own when they think their prices are going to plummet. They do this so that they can then buy back those stocks at a lower price than they originally did, earning profit. For example, a stock whose value is $10 is sold, and then, as the hedge funds predicted, their prices plummet to $5. The hedge funds then buy back the cheaper stock and make a profit of $5. The Redditors caught on to the fact that the hedge funds were about to do this with GameStop stock, and so they began unanimously buying the stock, causing its prices to soar. The increased demand of certain stocks that are being avidly bought and resold, like with GameStop, is called a short squeeze. This short squeeze continued to bring the price of the stocks up and ruined the hedge funds’ plan. The hedge funds had to buy back the stocks at much higher prices than they originally bought, which makes them lose profit.

With GameStop stocks rising, Robinhood suddenly announced that it won’t allow users to buy the shares of GameStop, AMC, BlackBerry or any other selected stocks. Robinhood is allowing the investors to sell, and within the first 90 minutes, the stocks dropped 70%. “The action in GameStop’s stock is a game of musical chairs and my advice for investors is to sell before the music stops,” said David Trainer, the CEO of New Constructs. Continuing, he added, “as fickle as the trading mob has been to select GameStop as one of their favorite stocks, they could be just as fickle as to when to let the stock drop.”

As more investigations are underway, the Securities, Federal Reserve, Treasury Department, and the Exchange Commission have looked into it. On January 29th, 2021 the Security and Exchange Commission responded by promising to “act and protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.” 

The stock market crash of 1929 resulted in the Exchange Act of 1934 which prevents groups from getting together to raise a certain stock’s prices. Robinhood is currently facing class-action lawsuits. Unfortunately, the sudden rise in GameStop’s stock won’t be able to stop its closure and will result in the loss of significant amounts of money for the investors who purchased GameStop stocks because it was rising. Within the last week of January, more than 1 million people downloaded the Robinhood app to start trading stocks in hopes of jumping on the bandwagon.