More stock news: Will American Airlines be saved by Reddit bros?
You can never underestimate the power of the internet, as it single-handedly saved GameStops stock prices this week. It’s been a battle between scrappy Reddit users and the established stock market hedge funds. Many outlets have made the comparison, but we agree, it’s a real David versus Goliath story.
As the battle between the Reddit subreddit r/WallStreetBets and the stock market rages on, more and more stocks joined the mix. Recently the struggling American Airlines is to be the next target for the subreddit.
It’s been a strange couple of days, and for those who might not be world-class traders, we’ll take a moment to explain what happened.
Short selling GameStop
The pandemic has only been good for one specific group of people: U.S. Billionaires. According to Inequality.org, U.S. Billionaires added $1 trillion to their net worth since the beginning of the pandemic in March, equivalent to 34% growth. Not surprisingly grew almost $70 billion during the pandemic, but that’s what happens when you own the largest e-commerce website in the world.
Amazon is on fire, however, it’s sucking the life out of retailers like GameStop, where the majority of their sales come from brick & mortar stores across America. GameStop has been struggling long before the pandemic. But combine a struggling business failing to keep up with Amazon and a global pandemic shutting down malls and forcing your customers to take business somewhere else, and you’d think twice about investing.
That’s what many hedge fund managers were hoping for when they tried to short the company. Short sellers borrow stocks from a given company (GameStop, in this case), hoping the price will drop because they can buy the stock back at the lower price and keep the profit, then return the stocks back to the company. One of the biggest short sellers is Andrew Left of Citron Research.
Short selling kind of sounds like a d*ck, mainly because you’re hoping a company goes bad. We should point out most stocks are sold on the hopes it does well. Citron Researched announced a live stream explaining why a short was a good option on GameStop.
The community fought back in what is known as a short squeeze, buying GameStop stock to drive up the price. Using simple numbers: if a stock starts at $10 and you short sell it, and the price goes to $100, you can lose more than 100% of the capital you put down, according to Vox. This has been an ongoing saga since Jan. 12th, where the stock was $1.36 – now it’s well over $250. Want a further explanation? Watch The Big Short.
During the chaos from GameStop’s rising stock price, a Reddit user posted, “AAL next GME”, using the ticker symbols for American Airlines and GameStop. Like GameStop, American Airlines was struggling before the pandemic and is now worse off during the pandemic. Small-time investors worried the airline would find the same fate as GameStop and, getting short-sold by investors, started buying American Airlines stock.
However, Robinhood stepped in and closed off trading to American Airlines, GameStop, and several other stocks that had prices skyrocket. If you’ve never heard of the app, Robinhood provides commission-free trading allowing anyone to invest. It’s great for anyone wanting to get their feet wet but can’t afford high commission fees. Many members of r/WallStreetBets use the app and are novice traders.
Throughout the month of January, American Airlines has traded in the $15 range – it’s now trading near $20. Not as big of a skyrocket as GameStop, but the mention on Reddit has the Securities and Exchange Commission worried. Robinhood is reopening limited buy for the stocks it closed to its users tomorrow, Jan 29th.
What’s the problem?
The fear is destabilizing the market and causing a crash. But, while it might feel like reprimanding the small investors that use Robinhood, the SEC is concerned about them just as much. At the end of the day, the small investors are the ones who are going to get hurt the most. These people might be betting their homes on GameStop or American Airlines in the hopes of financial success.
The career investors and hedge fund managers will get out and recover from the chaos. However, the fear is as the small bubble created by these small investors will pop, and small investors will lose everything.
Please know investing in the stock market is like gambling. Please make informed, conscious decisions about the stocks you’re buying. Also, before you join the subreddit to make a fortune in the stock market know that, according to an interview with IGN, one user explained, “people post random shit half the time.” They’re also worried people will lose money taking advice from the subreddit due to the notoriety.