- I'm not a trader
but I follow a subreddit on Reddit called Wall Street bets.
I hear that GameStop is going to rise.
So I have a little saved up.
I decide, Hey, I'm gonna buy a stock call option.
That's like buying a hundred shares of a stock on layaway.
You just need a fraction of the amount of money
it would take to actually buy 100 shares.
The trading day is just starting.
I'm betting that the stock is going to rise
but suddenly the website crashes, the phone lines are down.
I can't get in touch with anyone
and my trades are not going through.
So I forget about it
and I go along my day, make some coffee.
And then I look back at the site.
Somehow my account is down $9,000.
That's more than I even had in it.
- Investing in options is wildly dangerous.
You can lose an extremely large amount of money
or be down in position an extremely large amount of money
in a very short amount of time.
- Everyone loves the story of a little guy taking on the man
which is why GameStop's story to a peak stock value
of 480 plus dollars was front page news for days.
It'll be featured in forthcoming films
and even Congress is taking a closer look at the action.
But what's overlooked is the tremendous amount of risk
retail investors, small people like you and I take on
when entering into a market with so much volatility.
It's a story of math
but it's also one of the emerging technologies.
Before we talk about what's happened,
let's go over to Gamestop and see how they're doing.
Gamestop.
Let's go.
So, this is my local Gamestop
and apparently they closed just last month.
And that isn't a one-off because in the last two years,
they've closed more than 700 shops
with more closures to come.
GameStop's brick and mortar retail business
is in the dumpster.
This company's once high flying stock was trading below
10 bucks a share for all of last year.
In just a few weeks,
it had suddenly doubled, tripled, went up 10 times in price
and it was still going.
How was this possible?
Ever since the pandemic downturn in early 2020
the stock market has done quite well.
And millions of everyday traders,
new traders, have decided to take a turn
of rolling the dice at the market.
And then a group of Redditors saw
that there was enormous interest
in short selling certain stocks by
Wall Street hedge fund firms that have a lot of money.
Shorting is a bet that a stock will go down.
These hedge funds were targeting businesses in trouble.
This include stocks like
AMC theaters, bed, bath and beyond and of course, GameStop.
That caused Redditors to decide to target the hedge funds.
And it's still happening today.
- Wall Street bets is a community
that's been around for a little while
and it's always been kind of
an irreverent neolistic investment community
where people went for big gains and big losses
and strong positions and hilarious memes.
And you would buy stock
if you thought a meme was super great, just cause,
I mean, what did you have to lose?
- This is Madison Darbyshire.
She covers retail investing trends for the Financial Times.
Reddit users are not a monolith
but many of them got together to coordinate large purchases
of the stock and hold them.
This led to many who had short positions,
who were betting that the stocks would go down
to have to buy more to cover their bets,
which forced more short sellers
to get out of their losing positions by buying more.
It's hard to overstate how high the interest
of these stocks got on the week of January 25th.
The Wall Street bet subreddit
grew by millions of subscribers.
My Barber had stock options.
Even my therapist said that she bought Gamestop.
Sebastian Castillo is one of the people
who recently began trading again.
- Hey, everybody.
- He plays the options on the Robinhood app,
a much riskier form of trading.
- The bet I made for $600 is now worth $70.
- An option is a contract that gives you the right to
buy or sell 100 shares at the price you choose.
That's called the strike price.
For example, if you buy a call option of Gamestop at $100
it gives you the right to buy 100 shares at any time
between the moment you buy it and the expiration date.
So the math works like this.
Let's say the stock goes up to $105.
You could exercise your option
and the person who sold it to you
would be forced to give you 100 shares at $100 each.
So, you've basically netted $500 in profit, of course,
minus the price you paid for the option.
But if the price goes down
and ends below your strike price of $100.
Let's say it goes to $95, it's worthless.
You would never exercise your option because you would never
pay a hundred dollars for something valued at $95.
So you've lost all the money you paid for the option
in the first place.
- With options, it's almost like
stocks is checkers and options is chess.
- So to recap, if you're buying a call
betting that the stock price will go up,
you can make money if the stock price goes up
beyond a certain amount.
If it goes down,
you lose everything you paid for the option.
And a funny side note, Sebastian is actually a gamer
and a leader of a nerdy game group.
- I kind of have mixed reviews about this place
but I guess if you needed to pick something up
same day in a hurry, it would do.
- So he knew GameStop was worth much less
but that didn't stop him from investing.
- This is GameStop stock.
It's trading at $330.
When I checked the Wall Street bets forum
and people are talking about buying in
and holding it to go to the moon.
If that's not the moon, I don't know what it is.
- $330 a share.
That's more than 33 times what it had been trading
a month earlier.
According to polling, as many as a quarter of Americans
bought these meme stocks in January.
Stocks that were being heavily promoted on forums,
where app trading was popular
- During the game stock pandemonium,
there are times when the live ticker kind of froze
and even the trade button to buy or sell it was unavailable.
And that's when I knew things were
really getting out of control when they couldn't even
handle basic transactions.
- So many new investors had entered the market at this time
that brokers just had trouble keeping up
with all the orders.
And that's what happened to me
at the beginning of this video.
I put in a market order when the cost was low
but because the platform froze,
the trade didn't go through immediately.
It was filled much later
when the price had more than tripled.
So, I was thinking I was buying one thing
when I was on the hook for more than $10,000.
So it seems a few things were going on here.
First, Robinhood and others decided to halt trading
of the most popular stocks in America.
The sites just couldn't handle the load
of all of these users, which is known as-
- Operational resiliency is what they call
the abilities of the platforms to function
under times of extreme stress
and all of the investment platforms this year
have really struggled to maintain their functionality.
All these brokerage platforms have essentially
been built since the financial crisis.
10 years ago, you couldn't buy
stocks and shares on your phone.
- It was like staring at a screen full of numbers,
looked like a giant Excel spreadsheet.
It could be very intimidating.
The accessibility has really just exploded.
It's become so much more easy to understand ,
so much more easy to research new stocks.
- All of these platforms have had tremendous user growth
in the last year.
So they really are struggling to adjust
to the new level of investment participation.
- And some brokers
just simply didn't have enough cash on hand
to handle the amount of trades that were happening on mass.
Robinhood had to go and raise
a billion dollars from investors.
To wrap things up,
the risks are quite high for your average investor
entering into the market.
For one, stocks are highly volatile
and these meme stocks, who knows what could happen to them.
These apps like Robinhood and Webull aren't always
the most reliable place to invest your money longterm.
As for my personal story,
I waited a few of the most stressful hours of my life
and eventually the game stock price did rise.
So I was able to break even,
but it wasn't a wise investment.
I came away with a feeling like
the whole system was not meant to protect users like me
because I had no control over the situation.
- By the time information becomes widespread,
everybody knows about it
and you're not gonna get ahead of the herd
or the institutions that have access to this information
earlier and are able to execute trades faster.
So one of the things that surprised me the most was
how many people bought shares in GameStop
when it was above $400 only to be left holding the bag
when the price came back down to earth.