Written by MarketBeat Staff
August 12, 2022
If the stock market feels more like a casino to you these days, you’re not alone. The subreddit community r/wallstreetbets is being disruptive (at the very least) to conventional ideas of investing. This group of committed traders identifies stocks that they believe carry a high short selling risk.
Short selling, as we discuss later in this article, is a common practice. However, it does tend to benefit the institutional investors more than the little guy. And while sticking it to the hedge funds may not have been the original mission of the group, it has become its fixation.
This fixation is played out in the many “meme stocks” that have outperformed the market. This is despite the fact that many of these stocks offer little tangible reason for investors to buy shares. However, this group which colloquially refer to themselves as “the apes” are not interested in the old methodology of investing.
In this article we’ll provide a brief history of this group and we’ll provide a short list of some of the stocks that are currently capturing the group’s attention.
When Did WallStreetBets Start and Why is it So Popular Now?
WallStreetBets was created as a sub-category of the Reddit forum (otherwise called a subreddit) in 2010. The group’s founder, Jaime Rogozinski, sought to build a community that shared his passion for high-risk trades. In fact, Rogozinski says that one thing that inspired him to create WallStreetBets was that followers said his investing style was similar to gambling.
However, until 2020, the group was largely a fringe group on the internet. In fact, it took until 2017 for the group to reach 100,000 subscribers. However, in 2020, a number of factors combined to take the group to where it is today at over 5 million subscribers.
First, the Covid-19 pandemic gave many would-be traders time on their hand and few entertainment options. Then, you had stimulus money that these investors could use as “seed money” for taking aggressive market bets. And these investors also had access to trading apps such as Robinhood and Webull that allow commission-free trading that included the ability to trade on margin.
It truly was the perfect storm for WallStreetBets.
Why Short Selling is a Vital Part of the WallStreetBets Game Plan?
If you’re new to the WallStreetBets phenomenon, you should first take time to understand the concept of short selling. In a short sale, a trader sells an asset that they do not own. Specifically, an investor borrows an asset (e.g. shares in a particular stock) then agrees to buy it back on a specified later date and return it to the asset’s owner.
The expectation in a short sale is that the asset the investor is borrowing will drop in price. This means the investors can make a profit by selling their shares (which they don’t own) at a higher price and buying them back at the lower price.
Short selling is done on margin which makes it one of the riskiest forms of investing. That’s because the potential for loss is nearly unlimited. Nevertheless, hedge funds engage in the practice of short selling quite often. And that’s where WallStreetBets enters this discussion.
It has become the primary mission of WallStreetBets to “stick it to hedge funds” and they do this by creating what is known as a short squeeze. Here’s how that works. As we pointed out above, short sellers make money when they can sell stock at a higher price and buy it back at a lower price.
However, if the stock price starts to go up, short sellers will lose money. And if the stock continues to go up, the losses are potentially infinite. Plus, it can lead to other negative consequences. Fees can rise and/or the original investor (which can be another brokerage) will want their stock back. When this happens, the short sellers (i.e. “the shorts”) will have to cover their losses by buying the stock back at a high price. This of course is why certain stocks have gone “to the moon” in the words of the WallStreetBets crowd.
What stocks are capturing the attention of WallStreetBets?
GameStop (NYSE: GME) was not the first stock to capture the group’s attention. But it has become the symbol for the group’s mission. Although GameStop is pivoting towards an online model, there is little about the company’s fundamentals that suggest it will be a significant player in online retail. And it certainly isn’t worth the premium price that it has received from this group of traders.
Other stocks targeted by WallStreetBets include AMC Entertainment (NYSE: AMC). The company widely known for its chain of movie theaters saw its stock price ravaged during the pandemic. But the hope of a recovery combined with a popular CEO, and the embracing of crypto are just a few reasons why AMC stock remains popular.
Bed, Bath & Beyond (NASDAQ: BBBY) rose to over $35 a share in mid-2021 as the company’s revenue and earnings made it one of the retail stocks to show a strong recovery. But the stock has failed to follow up on those gains and it remains a strong candidate for short selling with over 47% of short interest on the stock as of August 2022.
Twitter (NYSE: TWTR) – Shares of the social media company have caught the attention of the WallStreetBets crowd as the question of if Elon Musk will buy the company remains unclear.
But perhaps the most widely known stock owned by the WallStreetBets crowd is Tesla (NASDAQ: TSLA). This group has played a significant role in the growth of TSLA stock. And you’ll also find bellwether companies such as Apple (NASDAQ: AAPL) and Nvidia (NASDAQ: NVDA) among the forum’s top stocks.
Some Final Thoughts About WallStreetBets
You need to look no further than the words of founder Jaime Rogozinski who said he was looking to build a community, “a place for people to talk about high-risk trades in an unapologetic way for people to make some short term money with disposable income."
Two things in that statement jump out to me. The first is “short term money.” That fits what Rogozinski describes as an investing style that’s similar to gambling. Also, the emphasis is on disposable income. In the initial run-up in GameStop many investors professed that they knew exactly what they were doing and were willing to risk it all because the money they had put in was truly disposable income.
The bottom line is that groups like WallStreetBets may not fit your investing style, but they are likely to disrupt the market for years to come.
