This January, the stock market was rocked by what is now referred to as the GameStop Short Squeeze. Along with others across the country, students at the University of Miami scrambled to get in on the action while it lasted.
This phenomenon started with a group of investors from the subreddit WallStreetBets, who noticed that a hedge fund had purchased shares of GameStop, a company that has been suffering at the hands of digital competitors and COVID-19, at low prices in hopes of selling them short, which has the potential to lead to a short squeeze.
“If companies are doing poorly, you can kinda bet against them, you can kinda bet that they are going to continue going down and out of business and you can make money on that,” said Professor Seth Levine, a full-time lecturer in the accounting department. “You can do something called selling short where you’re basically borrowing shares from somebody that owns GameStop with the promise that you’re going to buy the shares back at a later point hoping that the stock goes down. So when you have to buy them back you hardly have to spend any money.”
If the stock goes up, however, then a short squeeze occurs, and investors can lose money.
Investors on the WallStreetBets subreddit had been watching GameStop for a while, believing that it was being undervalued, and then decided to take action.
Dhananjay Narayanan, a sophomore studying health management and policy and business technology, is a part of the WallStreetBets subreddit.
“I always enjoyed viewing WallStreetBets because it’s like a meme subreddit of sorts that people could just enjoy and laugh at each other’s crazy investments,” Narayanan said. “So when the group had decided and found out that this hedge fund was going to price gouge GameStop all the way down, I realized that us as a group could really do something.”
Another student, Jorge Gonzalez, who is an English and psychology major, is new to investing and was skeptical about what was going to happen at first.
“I had heard it from a friend who had been there since the beginning and I pretty much told him that it was like a bad move to have a hand in,” Gonzalez said. “I was still extremely skeptical and extremely cautious.”
After weighing his options, he decided to invest in GameStop and recalled his feelings during its extreme increase.
“I wake up on Monday and it’s already over what I had entered in and I just kinda watched the roller coaster from there,” Gonzalez said.
Gonzalez, like many others, was surprised at the events that were occurring, as it was unlike anything seen before.
“That week was super entertaining, you’d go to school and suddenly everyone was a financial advisor,” Gonzalez said.
Gonzalez was able to make some money during the squeeze. He declined to say how much.
“I definitely learned not to pass up profits,” Gonzalez said. “It was a fun learning experience.”
While investors across the nation were witnessing these record increases of GameStop stock and deciding whether to invest or not, RobinHood, a popular investing app, placed restrictions on its clients to limit trading. This was an unusual move and a few other brokerages followed suit.
The investors using RobinHood, like Narayanan, were frustrated by this move.
“Robinhood, which is the brokerage I used up until then, shut my options down,” Narayanan said. “If they hadn’t shut off the options trading and investment trading in those stocks, I could’ve probably made a couple of thousand dollars.”
The stock market is volatile by nature, but stopping the purchase of the in-demand stock was nothing anyone had seen before. After GameStop plummeted and the price returned to a lower level, RobinHood explained that they could no longer meet the collateral requirements of the clearing houses.
“Big finance in America is basically the utmost proponent of extreme capitalism, and they hate anything that has to do with communism or socialism, but they’re the ones who essentially seized the means of production from the working class and even upper-class people who are trying to invest and make some passive income,” Narayanan said. “I think that’s kind of hypocritical of them.”
Gonzalez echoed Narayanan’s feelings of frustration with the brokerages.
“It just proves that at the end of the day, the big guy doesn’t want the little one to really get an upper hand,” Gonzalez said.
Many investors who took part in this phenomenon were younger, giving them less experience when compared to professional investors. Levine cautioned young investors to be smart and careful when investing.
“Students don’t know the basics of investing, but here they are without having taken an accounting class, without having taken a money class, without anything,” Levine said.
The university offers multiple accounting and money-related classes that touch on investing and how to do it safely. The Office of Undergraduate Financial Assistance also holds a Money Talks series that is available to students, which covers many financial literacy topics.
“Investing should not be looked at as gambling,” Levine said. “You could lose a lot of money, and you guys just don’t have a lot of money to lose—you haven’t even made it yet.”
Featured photo by Stephen Mosel via Flickr. Creative Commons license can be found here.