Is Reddit Changing Investing as We Know it?

In an unexpected turn of events, Reddit—the online forum usually reserved for spicy memes, cat videos, and conspiracy theories—has emerged on the national stage as a major player in the stock market.

If you are a citizen of the internet, it’s likely that you’ve at least seen some headlines regarding a particular Reddit board’s involvement in jacking up the share price for the American video game retailer GameStop (GME) over 1,700% since the beginning of the year. It’s equally as likely that you have some questions about what all the fuss is about.

What even happened? Why is this such a viral story? Should you be paying closer attention to Reddit for stock tips?

Let’s try and make some sense of the hysteria.

What the heck happened?

To keep this brief, I’ll do my best to boil it down to basics. In an effort to stick it to the Wall Street elite, Reddit users from the Wall Street Bets forum banded together on a large scale to invest thousands of dollars into GameStop (GME), a floundering video game retailer.

For context, GameStop stock was selling for under $4 per share as of July 2020, and as of January 27th, 2021 is now trading for $347.51 per share.

The dramatic increase, created absolute havoc for short-sellers who had speculated that GameStop stock would decline.

What’s a short-seller?

In basic terms, short-sellers are traders that are betting on certain stocks to decline in value. As part of a short-sell strategy, the trader borrows shares of the stock that they believe will decrease and then they sell those shares to buyers who are willing to pay the market price.

The idea being that once the share price (hopefully) declines, the short-seller would then purchase the borrowed shares at a price that is less than what they borrowed them for, and collect a profit.

It’s a strategy that many hedge fund managers use, and it can be highly effective when it goes to plan. But it can also be incredibly risky. If a short-seller borrows shares that end up increasing in value instead of decreasing, the short-seller then runs the risk of losing more than 100% of their investment since there’s no limit to how much any given stock can rise.

That’s where the Redditors come in.

What’s a short-squeeze?

The folks at Reddit.com/r/WallStreetBets detected that shares of GameStop were being shorted, and decided to band together to perform what’s referred to as a short-squeeze.

Redditors drove up the price per share, which in turn forced short-sellers to purchase the stock back at a higher price, which then also drove the price up even higher.

Is this illegal?

It doesn’t appear that anything overtly illegal has taken place, but I’m really not well versed enough in federal securities laws to comment.

The SEC released a statement saying that they are “…aware of and actively monitoring the on-going market volatility” and are “…working with our fellow regulators to assess the situation”.

It’s tough to say whether or not they’ll intervene, and if so what that will look like, but I have a feeling that we might see some new regulations emerge as a result.

Full disclosure: I got in on some of the action

To say that GameStop’s stock is volatile would be a gross understatement.

I’m not a stock adviser, and I have no illusions of expertise on the topic—but I will say that I bought a small amount of GME and after watching the value bounce around between negative and positive for a few hours, I promptly put in a sell order after seeing a quick 5.17% increase. I simply don’t have the stomach for risk, and I prefer to play the long game.

Will I keep an eye on Reddit for stock tips moving forward?

I always keep an ear to the street, so to speak, but I don’t imagine I’ll be hawking the boards with my investment app in hand waiting for the next stock to bet on. But hey—no judgment to the people who do.

It’s hard to predict whether or not this is a one-time phenomenon or an event that could potentially change the landscape of investing. As it stands today, there’s nothing in place to prevent this from happening again, which can be either exciting or scary depending on how you think about it.

I’ve been scrolling /r/WallStreetBets for months, and in that time I’ve seen several compelling success stories.

Conversely, I’ve seen a good amount of horror stories as well. One common theme on the board is users who post screenshots of their losses, which are only permissible to be posted on the board if the image shows losses of $2,500 or $10,000 for options or stocks respectively.

There’s already chatter about which stock(s) Wall Street Bets will get behind next—and which ones they’ve already gotten behind on a smaller scale than GameStop. It’s entirely possible that GameStop was just the first of many stories like this.

If you do decide to jump on the bandwagon, I would urge you to proceed with caution and as always, don’t invest with anything you can’t afford to lose.

Where to get started with investing today

Since the news broke regarding the “GameStop Gold Rush”, I’ve heard from numerous friends, coworkers, and family members who have a sudden interest in getting started with investing and have questions about where/how to start.

If you’re in the same boat, here are a few resources to get you going:

Robinhood

Robinhood is a great investment app for beginners because they offer commission-free trades and you can purchase fractional shares. Meaning that even though Apple (AAPL) is trading at $142.06 per share at the time of this writing, you could pick up a portion of a share for $5 and get started that way if you chose to.

Acorns

If you’re a little hesitant to go guns blazing into the market, Acorns is a great way to dip your toe into the water and start to build a portfolio with spare change. Acorns offers what’s referred to as “Round-Ups” that automatically invest the change from your purchases into the stock market. Say you make a purchase on Amazon with your credit card and the total comes out to $19.51. Acorn invests the other .49 on your behalf.

You might not think that spare change would make a difference, but you would  be surprised how quickly these funds grow!

Wealth building resources

For additional resources, check out our 5 favorite platforms for building wealth, or our guide on how to invest when you feel like you’re behind.

A final word on Reddit & GameStop

This is a story that’s likely just beginning and we’ll keep a close eye on the situation to keep you updated.

Do you have any experience with Wall Street Bets? We want to hear from you! Let us know in the comments.

The opinions expressed in this article are for general information purposes only and are not intended to provide specific advice or recommendations about any investment product or security. This information is provided strictly as a means of education regarding the financial industry.

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