Reddit investors shake up Wall Street

By CNN Business staff

Updated 10:21 PM ET, Thu January 28, 2021
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10:00 a.m. ET, January 28, 2021

Robinhood bans buying GameStop, AMC and other Reddit darlings

From CNN Business' Matt Egan

Robinhood imposed restrictions Thursday that prevent users of the free-trading app from buying shares of GameStop, AMC and other stocks targeted by Reddit traders.

Citing “recent volatility,” Robinhood said it will only allow users to close out their positions in those stocks, which include Best Buy, Bed Bath & Beyond, Express and Nokia.

Following the move by Robinhood, shares of GameStop (GME) lost all of their premarket gains and turned sharply negative.

Robinhood said that it also raised margin requirements for certain securities, a move that can protect the startup from losing money should some of these stocks plunge.

“We’re committed to helping our customers navigate this uncertainty,” the company said in a statement. “We fundamentally believe that everyone should have access to financial markets.”

10:02 a.m. ET, January 28, 2021

Stocks open higher but GameStop tumbles

From CNN Business' Anneken Tappe

US stocks opened in the green Thursday amid various economic reports: The US economy contracted by 3.5% last year, making it the nation’s worst year since 1946 and the first decline since the financial crisis.

Meanwhile, a lower-than-expected number of Americans filed claims for unemployment benefits last week.

While investors are digesting economic reports and earnings season roars on, GameStop (GME) continues to be in focus after various brokers have restricted trading in the company. GameStop plunged more than 20% at the opening bell.

9:54 a.m. ET, January 28, 2021

GameStop is now up 2,500% this year

From CNN Business' Paul R. La Monica

GameStop (GME) shares are now up nearly 2,500% this year -- surging from just under $20 at the end of the year to a current price of about $460. It's largely because of an army of investors who are buying the stock to hurt hedge funds that have bet against GameStop.

The phenomenon is called a short squeeze. An investor who thinks a stock will fall borrows the shares and sells them, with the hopes of buying them back at a lower price and pocketing the difference before paying back the loan.

The problem is that a short seller can get into a hole if the stock they borrowed keeps climbing. The losses, in theory, are infinite. So that creates another buying frenzy as short sellers rush to buy back the stock before it moves even higher.

9:59 a.m. ET, January 28, 2021

Why is the GameStop frenzy happening now?

From CNN Business' Allison Morrow

The way people trade stocks has been upended by the rise of no-fee apps like Robinhood.

That technology has democratized investing, giving armchair investors far removed from traditional banks free access to sophisticated trading instruments, like options.

You could pay an analyst to tell you what stocks to buy, or you could create a Reddit account and follow forums like WallStreetBets. Millions of young people are opting for the latter, which is partly why the sudden surges in GameStop (GME) and AMC (AMC) have caught Wall Street veterans by surprise.

9:50 a.m. ET, January 28, 2021

What's an option?

From CNN Business' Allison Morrow

Options are bets investors place on a stock, allowing them to buy (a "call" option) or sell (a "put" option) at a particular price. That allows people to wager on whether a stock will rise or fall.

Investors can place relatively inexpensive options bets and sell those options as they rise in value when the stock price gets closer to their wager. Buying and selling options isn't the same as buying and selling stocks -- but big options volumes can drive a stock up or down, typically because options traders buy or sell the stock itself as a hedge.

In the case of GameStop (GME) and other stocks targeted by WSB, traders keep buying options, forcing the investors selling those options to hedge their bets by buying up GameStop stock.

9:57 a.m. ET, January 28, 2021

AMC is surging, too

From CNN Business' Allison Morrow

An AMC theater on January 27, 2021 in Chicago, Illinois.
An AMC theater on January 27, 2021 in Chicago, Illinois. Scott Olson/Getty Images

A similar story was playing out with shares of AMC (AMC), the movie theater chain that's been devastated by the pandemic.

Shares of the new WSB plaything were up more than 200% Wednesday after members of the Reddit board and investors on Robinhood were touting the stock. The hashtag #SaveAMC was trending on Twitter.

Both AMC and GameStop spiked so rapidly Wednesday they triggered automatic halts designed to protect against volatility.

9:40 a.m. ET, January 28, 2021

Why GameStop?

From CNN Business' Allison Morrow

Short sellers tend to see GameStop going the way of Blockbuster — it’s a struggling brick-and-mortar business that’s expected to lose money and hasn’t adapted well to the digital age.

But the Reddit-driven surge began for a legitimate reason: GameStop (GME) announced on January 11 it had added three new directors to its board, including Chewy co-founder Ryan Cohen. Investors liked that Cohen brought digital experience to the table, something GameStop desperately needs.

The stock rose a little less than 13% that day. Two days later, it rose 57%. Then 27%. And so on. Investors following the Reddit group bought a ton of GameStop options, and short sellers had to buy shares to cover their losing bids.

On Wednesday, while all three major US stock indexes tumbled, GameStop finished a mind-boggling 134% higher.

Consider this: Just one year ago, a single share of GameStop cost about $4. It’s now $460.

9:38 a.m. ET, January 28, 2021

The cast of characters in the GameStop saga

From CNN Business' Allison Morrow

Who’s good and who’s evil in this saga? That all depends on your perspective.

The Redditors: On one side, you have a band of mostly young day traders who coordinate on the popular Reddit page WallStreetBets (aka WSB) to drive up the share price of struggling companies including GameStop (GME). At least one Reddit user posted that he'd paid off thousands of dollars in student loans with his GameStop gains. 

The short sellers: On the other you have hedge funds and short sellers — those who've placed bets that a company's stock will crash. Millions of people rely on these Wall Street elite to make the smart decisions that boost their portfolios. But they're detested by many Millennials and Gen Z-ers for creating a house-of-cards system that led to the 2008 financial crisis.