Normally, I wouldn’t have involved myself in something so seemingly inaccessible and intangible as the stock market. But like many others during the coronavirus pandemic, uncertainty in a time of national fiscal panic made me reconsider. In 2020, the unemployment rate spiked from a recorded low of 3.8% in February to a peak as high as 14.4% only two months later, compared with a peak of 10.5% throughout two years of the Great Recession. In unprecedented economic turbulence—and Internet accessibility—countless ordinary people are looking for other, less conventional means of both short- and long-term financial gain.
The Widening Wealth Gap: Retail Investing Spikes during COVID-19
According to Citadel Securities’ Joe Mecane, corona-driven price volatility led to casual traders (or non-institutional investors) comprising nearly 25% of market activity, as compared with roughly only 10% in 2019. Following the gradual easing of account minimums and commission fees, months of lockdown, volatile opportunity for high gains, and greater accessibility to trading tools with apps like Robinhood, retail investors have flooded the markets in search of the imperceptible profits typically reserved for the richest demographics.
Despite unemployment steadily dropping since April’s all-time high, financial recovery has since been unevenly redistributed. While Donald Trump had hailed the “V-shaped” comeback from COVID (or a return to normalcy), President Biden likened the recovery to a K—where “spoils have gone overwhelmingly to the rich,” CNBC’s Greg Iacurci explains. Lower earners, people of color, and women (who are disproportionately overrepresented in the service sector) have borne the brunt of the burdens wrought by unemployment and financial insecurity. Compared with the national unemployment peak of 14.4% in 2020, the rate for Black and Latino Americans peaked at 17% and 19%, respectively.
While I’m not presuming to know reasons and mindsets behind all retail investors’ choices, there is undeniably an association between the increasing wealth divide, financial insecurity, and the spike in retail investors’ activity. For varying reasons, it’s likely that a growing awareness of the ever-increasing wealth gap in the face of a dire and disproportionate economic plunge has ultimately helped set the stage for the GameStop showdown.
How Reddit Got Involved
Around September 2020, the Reddit forum r/WallStreetBets found out GameStop was one of the most shorted stocks on the market, meaning more shares were controlled by short-sellers than were available to buy on the market. Short-selling happens when institutional investors try to make a profit off of an already declining or failing business, essentially betting that the company will continue to struggle and decrease in value—while increasing investors’ potential for profit.
Shorting works by borrowing another investor’s stock with the promise of returning it later (and hopefully at a lower price). For example, imagine a friend leaves for a year-long vacation and lets you borrow her laptop while she’s gone. You know that a new model of the same laptop is coming out soon, which would lower the value of the current one, so you decide to go and sell the laptop for $500. Six months after the newer laptop has been on the shelves, you buy your friend’s older laptop back for only $200. When she returns, you hand her back her laptop—and pocket the $300 difference.
Like any kind of gambling, betting on the value of a company can be a matter of unbelievable profit—or unforeseen loss. When Reddit users discovered that hedge funds were betting on GameStop’s failure, they saw an opportunity to turn the tables of profit—by buying enough shares to drive GameStop’s value back up again. Day-traders collectively stormed the market during the last week of January 2021, causing GameStop’s stock price to explode as much as 400% over the past three months. Unlucky short-sellers were forced to start buying back their borrowed shares sooner rather than later to minimize their losses in the ever-upward trend, further fueling the price surge in what’s known as a “short squeeze.” Share price spiked nearly 70% that Friday alone.
The Meritocracy Myth: No Risk for the Rich
The illusion that the stock market has always been wholly accessible epitomizes the myth of our meritocracy. Policymakers and government officials have long since molded the American Creed into the mantra of personal responsibility, a fool-proof strategy of insisting that hard work and discipline are the definitive determiners of success in America—not socioeconomic disparities or racial discrimination. This political trend of neoconservativism reached a peak during the Cold War period as a means to refute international accusations of structural racism.
Although “risk” has allegedly always been the idea behind the stock market, GameStop made national news because the real “risk” turned out to be the flow of net profit in the wrong direction: from the rich to the regular. Despite the rhetoric of risk and responsibility, Wall Street wealth has always been disproportionately cushioned from financial downfall at the expense of everyone else—we saw it in 2008, and we’re most certainly seeing it again now.
Despite more than 300,000 Americans dead and millions more left unemployed or homeless, the S&P 500 has seen record surges, capping off 2020 with a 16% increase. Even more astounding, this resurgence is in part thanks to the $2 trillion stimulus bill, the largest in national history. With access to attorneys, money managers, and other resources often unavailable to small or failing businesses, it’s no wonder Wall Street was able to secure far more than its fair share. That a pandemic-driven economic shutdown of unprecedented proportion has resulted in “stocks ending the year 15% higher is mind-blowing,” remarks Michael Farr, a money management firm president quoted by The Washington Post. Certainly "trickle-down economics” at its finest.
GameStop: The Wrong People Making Money
With exclusive access to high-speed trading technology and after-hours markets, GameStop made national headlines because ordinary day-traders were beating the Wall Street elite at their own game. After deriding the “dumb money” pushing its way in, Melvin Capital was one of many hedge funds ultimately burned by their short positions in GameStop, losing roughly 30% of its assets in the first few weeks of January alone. Luckily, the hedge funds Citadel and Point72 then “invested” a bail-out of nearly $3 billion to assuage the loss. Not everyone was meant to bear the unacceptable twin burdens of risk and loss—the same way a casino does its best to ensure the House always wins.
Once the direction of money flow was obvious, a controversy erupted over Robinhood’s decision to restrict GameStop buying on January 28, the height of the price peak. Robinhood has since refuted accusations of protecting Wall Street’s interests and insisted the reason for restriction was really a lack of sufficient securities to take on the sudden upsurge in trading activity. However, despite Robinhood’s proclaimed mission to “democratize finance for all” by making investing simple and accessible, it certainly wasn’t prepared for its alleged target constituency (amateur traders) to rake in substantial gains. Ironically, Robinhood actually makes money by passing on its customer trades to large brokerage firms like Citadel. Believers of Robinhood’s supposed mission to help out the “little guy” would also be disappointed to know that the app’s oversimplification of investing can actually have quite the opposite effect. With digital confetti, color-coded buttons and ad-like suggestions on what to buy and sell, behavioral researchers suggest this “game-ifying” of the stock market can encourage novice investors to take tremendously dangerous risks, according to the Wall Street Journal. At the end of the day, this seems to me like a pretty clear case of a wolf in sheep’s clothing.
The Future of Economic Democracy
As the demographics of the stock market continue to change, companies will be gradually forced to learn how to engage their new constituency. Although management boards are all too used to catering to institutional rather than individual shareholders, this surge in retail investing means that individual owners “can no longer simply be ignored or taken for granted,” writes Bruce Goldfarb, President and CEO of Okapi Partners. Goldfarb suggests that in order to succeed, companies must overcome what he calls “retail shareholder apathy” by acknowledging and communicating with retail holders directly.
According to Goldfarb, the shift toward retail holders has already changed the ownership base of many companies, which can significantly impact both “corporate governance and shareholder democracy.” In other words, as the shareholder populace continues to diversify, companies will be forced to accommodate a wider variety of interests in order to stay afloat and continue making money.
Now that GameStop share values have plunged back down, we can only hope that recent events will serve as an example of what can happen as a result of partial and extreme wealth privatization. We can't manage the social volatility of political rallies and economic turbulence without taking collective action on all levels to ensure that regardless of socioeconomic status, every individual has access to not only equal but meaningful opportunity to be contributing and constructive citizens.
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About the Author:
Alyssa Boyle is a recent graduate of Binghamton University with a B.A. in Linguistics and Korean Studies. An aspiring young professional in journalism, she strives to ensure the dissemination of credible information on all things current events, politics, wellness and more via original and research-backed content. In addition to writing for Start:Empowerment, she has also worked on several other editorial teams to produce, publish, and optimize valuable and verified content, including Weill Cornell Medicine and The Muse. In her free time, she enjoys writing stand-up comedy and drawing political cartoons. Say hi on LinkedIn or Instagram @_alyssa_boyle_