investing

‘I Thought I Realistically Could Make $25,000 Off of This:' Why Redditors Are Holding GameStop

SOPA Images | LightRocket | Getty Images

After reading the classic finance book "The Intelligent Investor" a few years ago, Ryan, who asked that his last name be withheld to protect his privacy, became interested in learning more about how to use the stock market to build wealth.

Naturally, the now-24-year-old turned to the internet to continue his financial education. He says online forums like the now-infamous r/WallStreetBets (WSB) subreddit taught him more about money and investing than any book.

So when some WSB users began making a convincing case to buy GameStop stock at the tail end of 2020, Ryan's curiosity was piqued. The Detroit resident has a decent-paying day job and invests responsibly in mutual funds via his 401(k). But because he works from home and tries to adhere to social distancing rules, he also has some discretionary money to spend month to month, and has been dabbling in day trading via his Charles Schwab brokerage account. The thought of earning potentially thousands of dollars on a single stock was appealing.

"I make [around] $80,000 per year, and I thought I realistically could make $25,000 off of this, from the numbers I was looking at," Ryan says of his reasoning for buying. "The information that was provided to me made a lot of sense."

He bought 30 shares of GameStop stock in December. At that point, they were worth just over $17 per share. As the stock began to take off at the end of January, Ryan bought 19 more at just under $39 per share, bringing his total investment to $1,200. When GameStop closed at $225 per share Monday, it was worth just north of $11,000.

Ryan was pleased as his investment grew throughout January, and then shocked as worldwide attention over the past few weeks sent it sky-rocketing. But as investment platforms like Robinhood began halting trading of GameStop and other stocks last week, his joy transformed into anger over what he considered Wall Street not playing by its own rules once it started losing money to the little guy.

Like many others on WSB, Ryan became less concerned with making money at that point, and more interested in sticking it to hedge funds that had planned to short the stock. As of Monday afternoon, he was still holding his shares out of principle despite the dip in prices from the previous week.

"I want to make money out of this," Ryan says. "I didn't buy out of spite." But as last week's actions unfolded, he says he's now "on board" with "bleeding" the hedge funds, a popular sentiment among WSB.

Leveling the playing field

Importantly, the money Ryan invested won't make or break his bank account. He'd prefer to get a return on his investment — but he can afford to lose it. Plus, he believes there is still more money to be made, given GameStop's current short rate. And Ryan's far from alone. WSB is still betting that holding GME will pay off.

"It doesn't worry me," he says of potentially losing his investment if the stock tanks. "The idea that some of these big banks, these hedge funds, are burning right now, I'd rather see that happen. It's time for the common person to be on the same level as these hedge funds."

While Ryan is taking calculated risks, experts warn that the situation is becoming dangerous for many individual investors who may see the headlines and, incorrectly believing that the situation is simply a David vs. Goliath story, jump head-first into the hype without doing their research.

There has been some speculation that the trading frenzy surrounding GameStop and other stocks is turning into a "pump and dump" scheme. Typically, this occurs when scammers buy cheap shares of a company before boosting its stock price by sharing positive, but fake, information. The fraudsters then encourage others to get in on the "rocket ship," before selling their own shares at a high point and watching the price fall back to earth.

But GameStop isn't a classic pump-and-dump; there are real reasons many Redditors and other institutional investors bought shares of the stock and, in some cases, plan to keep holding. Still, non-professional investors without a lot of money to spare could lose out if they buy now.

"This is tremendously dangerous for retail traders who haven't traded before," James Royal, senior investing reporter at Bankrate, previously told CNBC Make It. "The stock can drop precipitously in a matter of seconds or minutes. If you have no experience dealing with that kind of thing, you will lose your money very, very quickly."

Ryan, for his part, isn't worried about losing out.

"I'm confident in my ability to pull out when I need to," he says.

Check out: 

Don't miss: The best credit cards for building credit of 2021

Copyright CNBCs - CNBC
Contact Us