So what caused GameStop prices to soar, and a class-action lawsuit against Robinhood? 

GameStop and the Video Game Industry

The video game industry is one of the fastest growing industries to date, and is projected to reach over $300 billion by 2025. It’s not just kids that are playing video games, either. There are an estimated 2.7 billion video game players worldwide in 2020. Enter GameStop. GameStop is an American video game, consumer electronics, and gaming merchandise retailer. Just last year amidst the coronavirus pandemic like many other companies, GameStop had taken a hit, and was closing down stores across the country as the majority of video game purchasing had shifted online.  

Because of this, Wall Street investors were betting heavily against the company. To them, the math clearly pointed to GameStop’s demise. In their eyes, the smart thing to do was to short sell the stock.

Short Selling Stocks

Short selling is a complicated trading strategy. To short sell means that you are certain that there is a stock that is going to go down in value (much like wall street investors with GameStop). Stock prices tend to fluctuate over time, but if a company is losing value, stock prices will plummet. You then borrow the stock from a lendor, and then sell it to someone else. In a few weeks, if you were right, and the stock price did in fact go down, you can now buy it back for a lower price. So if you sold the stock for $10 and now buy it back for $5, you have made a profit of $5, and can now return the stock to the lender. However, if you were wrong about the stock going down in value, you could potentially be facing major losses.

Enter Reddit. More specifically, a popular Reddit forum of r/WallStreetBets, which mainly focuses on trading stocks. A lot of Reddit users started encouraging others to invest in the company, and it was significantly undervalued. Eventually, this opinion became more and more popular, and so did the idea of going against big Wall Street investors. This market phenomenon went viral, as the price of GameStop skyrocketed. And the more its price grew, the more losses the Wall Street Investors were facing.

Now, enter Robinhood. This investing app sparked more than a little controversy when on Jan. 28, it began limiting users from buying GameStop stocks, citing a lack of deposit money needed to process the transactions due to the exponential increase of sales. Essentially, Robinhood didn’t have enough cash to meet its regulatory requirements. All of this culminated in a lawsuit being filed, and who knows what’s to come.

                                                                                                                                                                        This unprecedented and fascinating controversy has already made a large impact outside the stock market and gaming world, with market regulations coming into question: can something of this magnitude be ever accomplished again via Reddit or other social media sites, or will new market regulations be put in place to make sure this never happens again. If so, how will that impact the freedoms of the market and the average investor? Only time will tell…