Robinhood – an online brokerage company whose app provides users with the ability to buy stocks with the push of a button – was a key factor in creating mayhem on the blog site Reddit in regards to stock trading on Wall Street. The rawkus was centered around the stock of the company, GameStop, who’s stock plunged more than 40% on Thursday after climbing 40% earlier in the day.
The stir was caused on Reddit because Robinhood began restricting the trading of GameStop stock, as well as stock of several other companies. The shares for GameStop began to fall and trading was halted several times Thursday, after having increased all week from individual investors on Reddit. These particular investors are intent upon hurting hedge funds.
Hedge fund investors will often bet against GameStops share values. This tactic is called a “short squeeze” Investors who believe a stock will drop borrow shares, sell them, and then hope to buy them back again at a lower price, thus keeping the difference before paying back the money they borrowed. Individual investors on Reddit have made strides in fighting back against short sellers. This is, in large part, thanks to no-fee trading via online brokerage companies like Robinhood. Yet, when Robinhood and other online brokers restrict the trading of shares, individual investors are cuffed in turn.
The concern is that average investors may be missing the long-term risks, because even though GameStop has seen a meteoric rise in 2020, there is worry that their model is not sustainable and the growth could stop and reverse. Video game retailers have been losing money over the last few years as buying physical copies of games has yielded to the more popular download model.
The GameStop phenomenon has taken Wall Street by storm and forced the White House and the Federal Reserve to investigate further into the matter.