In this article, Shruti Chand (ESSEC Business School, Master in Management, 2020-2022) elaborates on the concept of WallStreetBets.
This read will help you get started with understanding WallStreetBets and understand its impact in the stock market.
Meaning of WallStreet Bets
On the social media website Reddit, there are specific online communities that are dedicated to discussion on a particular topic, these are known as subreddits. And, WallStreetBets (r/wallstreetbets), or WSB, is one such subreddit. On WSB, the members discuss stock markets and options trading.
WSB has gained notice due to its aggressive trading strategies, indecent nature, and its role in the GameStop short squeeze. Members of the WSB are often young retail traders who are said to have a highly speculative style of trading that ignores the traditional investment practices and risk-management techniques. Their activity is even considered to be on the lines of gambling.
The growth of such individual investors has been powered by the rise of no-commission brokers and mobile online trading platforms (like Robinhood) which have made trading easy and accessible to everyone. Members of these communities like WSB often use high-risk day trading as an opportunity to make quick financial gains and obtain additional income.
The GameStop Short Squeeze
It would be unfair to talk about WSB and not discuss the GameStop Short Squeeze, an incident that threw the market into chaos and disrupted trading.
GameStop, a struggling company in the video games business, had become one of the most bet-against stocks on the market. Many big investors (hedge funds like Melvin Capital et Citron Capital) had taken large short positions on the stock, hoping to cash in on the company’s inevitable failure. Short selling is an incredibly risky strategy as the loss can be infinite when the stock price is going up. Members of WSB are said to have an aversion towards short sellers because of how it affects the financial system.
In January 2021, harnessing the power of the internet, Redditors on WallStreetBets started encouraging each other to buy the GameStop stock to drive the price up, which would adversely affect the short-sellers. This coordinated effort led the GameStop stock price to begin to rise. Eventually, GameStop had become a movement, which was not just about making money but about taking down ‘the man’ and punishing short sellers. It even led to the coining of the term ‘meme stock’. It attracted a huge amount of media attention and the number of members of WSB rose from 2 million to 6 million in a matter of days. As a result, in a mere few weeks, GameStop stock prices increased by a whopping 1700%.
Previously, it was believed that individual investors (also called ‘retail’ investors) have no real impact on the market and that such a thing was only within the capability of the big players of the game. This notion was successfully challenged by this incident. It was seen as the ‘little guys’ taking down the giants of Wall Street. It is believed that this trend of democratization of investing is here to stay.
After the GameStop short squeeze, it was anticipated that such manipulation in stock prices could happen again when groups like WSB target more companies. It turned out to be true as many stocks like AMC, Blackberry, etc. saw a surge in prices in an apparent Reddit-fuelled short squeeze.
In the financial world, WallStreetBets has received varied reactions. Trading platforms like Robinhood have tried to curb the power of Redditors by limiting transactions on the grounds of protecting customers. Many analysts and investors have derided and leveled insults at the WallStreetBets investors.
Whatever the future may hold, it is apparent that together, these amateur investors are changing some long-held beliefs about investing and they are gaining influence in the market in the process. Their online interactions have led to the reshaping of the power dynamic between retail and institutional investors.
Relevance to the SimTrade certificate
This post deals with WallStreetBets in the Stock Market. More so, we learnt that retail investors can also have a real impact in the market.
- By launching the series of Trading Exercises, you will practice how investors can become an investor in the stock market.
About the author
Article written in May 2021 by Shruti Chand (ESSEC Business School, Master in Management, 2020-2022).