Reddit-Fueled Stock Inflation Provided Quick Profits Before End of Meteoric Rise

In recent weeks, Reddit communities have sent the stock market into a frenzy by boosting certain stocks, and some students invested in these inflated stocks for a quick and easy profit.

Fueled by Reddit subgroups like r/wallstreetbets, stocks including Gamestop, BlackBerry, and AMC became the target of an investment push, starting Jan. 13, causing prices to skyrocket. Inflated prices created a market frenzy, frustrating hedge fund investors who shorted, or bet against, the companies’ financial performance.

Stocks issued by the video game store chain Gamestop Corp. were at the center of the phenomenon. On Jan. 13, company executives announced new board members, spurring members of Reddit subgroups to seize upon the company’s stock. Amateur investors pushed the value to $31.40 — up 78% from its $13.66 price on Dec. 8. At its peak, the stock soared to $347.51 on Jan. 27, and is now valued at around $50.

Austin Chitmon, a senior majoring in computer science, bought into Gamestop and Blackberry during the middle of the saga, he said.

“Jan 26th is when I first started playing the meme game,” Chitmon said. “I bought into Gamestop at $215 per share, and I sold the next day, for $320 per share. I also did BlackBerry on the 26th, I bought at $218 per share, and sold on the 27th at $225.”

Buying into these stocks was simply a fun thing for Chitmon to do with his friends, he said. Although he usually invests in long-term stocks using investment management company Vanguard, Chitmon used investment app Robinhood for the viral stocks.

“I just threw some cash that I didn’t care to lose and whatever happens,” Chitmon said. “I pulled out at the right time because I made money, and (did not lose) money like a lot of people are. Robinhood to me is like the casino.”

Ryan Gadbois, a junior majoring in finance, said he bought Gamestop and BlackBerry stocks before they hit their peak price. Although he bought early, he decided to keep holding them, hoping the prices would continue to soar. However, on Feb. 4, he realized prices were falling, so he decided to sell.

“Initially, I bought (Gamestop) in around $89, and then I bought some more shares at like $90 to $100, I kept progressively selling in the 200’s and sold most of my position,” Gadbois said. “Once it got under $200 I was like ok it's time to get out, so, at the peak I had gains around $5,500, but I got greedy and only made out with like $2,100.”

Tim Riley, a UA assistant professor of finance, said when looking at the stocks from a risk-benefit perspective, it did not make sense to purchase such volatile investments. However, from a short-term investment perspective, if one could get in and out fast enough, then that could justify making the trade.

“In terms of how you evaluate a security, buying Gamestop at these inflated prices would have been nonsensical,” Riley said. “From a short-term trading perspective though, there could have been rationals to jump in on that trade.”

After shares became highly volatile, Robinhood restricted transactions for these stocks. This move sparked backlash and from many users and big-name personalities on social media, who accused the company of conspiring with hedge funds. Chitmon, though, said he did not see a problem with the app’s policy.

“I don't think there’s some cabal, like hedge funds who own Robinhood, telling them, ‘Hey you need to restrict shares because we're losing a lot of money,’” Chitmon said. “I don't think Robinhood caused security price to decrease as much as people think, it was just hedge funds realizing, ‘Hey this is time to pull out, it's high, it's good, we got our gains, let’s leave.’”

Despite whether Robinhood was trying to bail out hedge funds that had shorted the stock, Gadbois lost respect for the company, he said.

“Their excuse was, ‘Oh we couldn't meet the capital requirements or the clearinghouse, so we weren't able to fulfill the trades,’” Gadbois said. “But then it begs the question of why can’t you handle this kind of volume, what does it say about a brokerage?”

While there are important lessons to learn from the Gamestop situation, it pushed more important topics under the rug, Riley said.

“A bad thing about this is that it did distract from other important economic stuff that’s going on,” Riley said. “There was a big debate about raising the minimum wage, there were oil companies mergers, all of these stories, in the end, were pushed under Gamestop.”