Assistant Professor of Sociology
University of the Bahamas

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If you have been in a shopping mall or strip mall in the last decade or so, you have no doubt passed by or stopped into a GameStop store. Famed for its willingness to take trade-ins on video games, game systems, movies, and other entertainment products, the 37-year-old company has recently made it into many news headlines. This is largely due to the collective action by a dispersed network of social media users originating from a webpage, Wall Street Bets, on the popular social media site, Reddit. In a matter of weeks, Redditors’ purchase of GameStop stocks, colloquially known online as “stonks,” led to a swell in the company’s value from $2 billion to $24. This 1,200% increase in value led to large profits for thousands of social media users and other investors while causing significant losses for hedge fund firms on Wall Street. To understand what happened, we need to discuss the nature of capitalism, the stock market, and hedge funds.

Capitalism is an economic system based upon the private ownership of property, market-based competition, and the pursuit of profits. In a market, prices are determined by the relationship between supply and demand. In finance capitalism, rather than engaging in entrepreneurship or the production of goods and services, profits are generated by buying and selling stocks, bonds, and other financial assets. Purchasing stock in a company makes one a partial owner of that company, and this allows stock owners to share in the company’s profits. When the demand for stocks goes up, the prices and value of the stocks go up as well. Sometimes, stock prices go down, though. For some, this is a time to sell that stock to avoid losing profits. For others, this is a time to buy if there is reason to believe that the stock price will go back up. However, there are some people who profit from a stock going down in price by engaging in short selling. To put it briefly, short selling is borrowing stocks and then selling them off at market value with the intention to buy them back if and when prices fall. Short selling can be risky if the stock price rises in value, and this is where some Reddit users profited off GameStop stock while some Wall Street hedge funds lost billions of dollars.

Due to trends in digital game purchases online, many people have stopped purchasing physical copies of games. As a result, fewer people need to trade in games at stores like GameStop. In 2019, GameStop lost nearly $800 million, and it closed many of its outlets. So, the business was not earning its stockholders profits. Some Wall Street firms were betting against the stock going up above its price, which fell below $10. Many hedge fund firms, like Melvin Capital, borrowed so many stocks in GameStop that it was one of the most shorted stocks in recent history. These firms were hoping that they could sell their borrowed stocks at market value to later buy them back at a lower value to make a profit. These short sellers were depending on the stock prices staying low or going lower, but some individuals, such as Redditors and other investors who saw the signs to buy, bet against the short-sellers. Many of the investors used a trading app called Robinhood and began buying these “stonks.” This caused the short sellers to lose billions of dollars because they had to buy back their stocks for many times the price at which they had originally borrowed them. Robinhood (the app) and the Securities and Exchange Commission stepped in and disallowed the trade of GameStop stock. This all calls into question not only the ethics of short selling, but also the ethics of finance capitalism. In finance capitalism, Wall Street firms and netizens of social media sites like Reddit can manipulate the value of a company. If it takes money to make money, is it fair to borrow a stock to profit when it loses value? Further, what are the differences between Wall Street firms colluding to affect stock prices and individuals coordinating their activities through social media?

Questions for Discussion

  1. How familiar with finance capitalism were you before reading this article? What might be some societal causes for your understanding of stock trading, short selling, and other aspects of finance capitalism?  
  2. Who profits from short selling—and from finance capital in general? Who has access to the financial market, and how has this changed with the advent of social media?  
  3. Karl Marx, who is associated with the conflict perspective in sociology, famously divided the world between the owners of the means of production (i.e., the bourgeoisie, the capitalist class) and those who sell their labor (i.e., the proletariat, or working-class). How do finance capitalism and the case of Reddit investors in GameStop complicate Marx’s bifurcation of social classes?

References

Sources: The New York Times, January 27th, 2021 “‘Dumb Money’ Is on GameStop, and It’s Beating Wall Street at Its Own Game.” By Matt Phillips and Taylor Lorenz https://www.nytimes.com/2021/01/27/business/gamestop-wall-street-bets.html

CBS News, January 29th, 2021 “How Reddit posters made millions as Wall Street lost billions on GameStop's wild stock ride.” By Stephen Gandel https://www.cbsnews.com/news/gamestop-reddit-wallstreetbets-short-squeeze-2021-01-28/  

Forbes, February 14th, 2021 “GameStop, Reddit And Robinhood - Ten Financial Fault Lines Laid Bare (2/2).” By Frank Van Gansbeke https://www.forbes.com/sites/frankvangansbeke/2021/02/14/gamestop-reddit-and-robinhoodten-financial-fault-lines-laid-bare-22/?sh=b78df734f66e