Following the historical rise in the price of the most “shorted” stocks on the Wall Street stock exchange, driven by the swarm of hundreds of thousands of small investors coordinated through Reddit on the “Wall Street Bets” forum. Robinhood Markets and other online brokers were forced to block these stocks’ purchases to avoid millions in losses to their investors and two investment funds. Melvin Capital and Citadel.
In the short, a position is opened by borrowing shares of a company, or another asset, that the investor believes will decline in value at a set future date: the maturity date. The investor then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed shares are returned, the trader bets that the price will continue to decline and buy them at a lower cost. The risk of loss on a short sale is theoretically unlimited since any asset’s price can rise to infinity.
The news of the blocking of the purchase of more than 45 shares that were revalued after the Reddit frenzy caused fury in the social media and protests in the streets, causing brokers to re-allow the purchase of these shares on their platforms.
The Gamestop (GME) stock price experienced a 75% rise since broker Robin Hood lifted the restriction on buying shares in this and other companies that rebounded in value following the Reddit boom.
Although Robinhood had to retract the decision, the company limited the number of shares that can be bought per day, with GameStop (GME) being the most restricted, with a limit of just one share. Other companies such as movie theater franchise AMC or cell phone maker Blackberry have a limit of five shares. On Friday, Robinhood maintained restrictions on purchasing about 50 shares.
Despite continuing to impose trading restrictions on GameStop, AMC, and six other stocks, Robinhood removed restrictions on 42 other stocks on Sunday. Still, customers can buy only 1 share of GameStop and a maximum of 10 shares of AMC.
Reddit created a bubble that cost hedge funds billions of dollars
The loss of short sellers totals more than $19 billion, including the investment fund Melvin Capital, which closed its short position to avoid further losses but did not avoid having to be rescued with a capital injection of more than $3 billion.
The GameStop phenomenon is not limited to the video game company’s shares. At this moment, thousands of people are informing and advising on investment strategies in forums such as Wall Street Bets and are beginning to impact the stock market.
Some companies, such as the ailing fashion retailer Express, benefited from Reddit’s euphoria, as despite sales dropping 34% and reporting losses in excess of $90 million, its share price last month rose 400%.
Australian mining companies are also benefiting from Reddit
A group of traders on another Reddit forum of investors in the Australian stock market, ASX_bets, got up the price of a lithium battery maker, a biomedical research company, and two mining companies.
The price of the lithium miner, Lake Resources, climbed 304% on Tuesday; the stock was worth almost $375 on Tuesday. While all this was going on, the biomedical company BPH Energy opened on Friday with a value 295% higher than it had opened on Monday, going from being a stock worth less than 100 dollars to worth more than 300 dollars.
Meanwhile, lithium battery manufacturer Novonix saw its share price rise 115%, and Vita Metal, a valuable minerals mining company, rose 41% since the beginning of the year.
The precious metals market is the next on Reddit’s sight
Wall Street Bets has also caused the silver price to experience a surge not seen before Lehman Brothers’ fall in 2008. U.S. metal retailers ran out of physical inventory following the silver price surge, which reached $30 an ounce, rising 11.5% in a single day.
Companies such as London-based Fresnillo PLC, with mines in Mexico, or Canada’s Majestic Silver Corp, and Pan American Silver Corp. benefited from Reddit’s silver euphoria by seeing their share prices rise 12%, 24% and 16%, respectively.
Further, platinum futures prices rose 4.7%, at 1,129.50 a troy ounce. Gold also seems to have experienced a small rise due to the increase in the silver price.
Whether precious metals or stocks, it seems that online brokers, along with social media like Reddit, have made the stock market accessible to thousands of people, who despite having a much more limited portfolio than banks and investment funds, together can make visible impacts on the stock market and even compete with the multi-billion dollar firms.