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Social media fuels GameStop, AMC stock surge

The two struggling businesses' stocks have made unbelievable moves this month that have Wall Street investors baffled.

LOUISVILLE, Ky. — As the stocks of GameStop, AMC and other companies shot up this week, University of Louisville Professor Jose Fernandez watched the wild rise.

"It's an amazing story," Fernandez said. "They'll probably make a movie about this sometime in the future. And it's still playing out."

Fernandez, the chair of the economics department at UofL, said while social media has had an influence on the stock market before, he has not seen anything like this, where at one point, GameStop's stock price shot up 1800 percent.

"Some people thought GameStop was undervalued at $3, but it certainly isn't at $337," he said. "That's way crazy overvalued."

The soaring stock prices is a result of traders on the "Wall Street Bet" subReddit encouraging people to buy GameStop, AMC, Blackberry, Nokia and other stocks that hedge fund investors have shorted. 

Shorting stocks is a process where investors will borrow stocks they believe are overvalued and then sell it immediately. They then bet against these stocks and wait for it to drop before buying back the stock at the lower price, returning the stock and pocketing the difference.

The traders on the "Wall Street Bet" subReddit decided to target GameStop stock after hedge fund investors decided to short the company's stocks, which has led to more than $5 billion losses for GameStop short sellers.

RELATED: GameStop soars again, and Wall Street bends under the pressure

"By doing so, you are forcing that hedge fund company to actually have to pay more rather than make a profit off the loss," Fernandez said.

Thursday, several trading platforms like Robinhood decided to restrict trading on these stocks before lifting the restrictions after facing severe backlash.

"One group says they're just trying to protect the lowly investor that doesn't know any better and they could get caught in losses," Fernandez said. "And that's not wrong but at the same time, they're already a day trader. They understand that they have those potential losses that are in play. At the same time, it looks like they're shielding these hedge fund managers because potentially the stock could go up further and further and further."

While Fernandez is a spectator, Nick Kurnik has skin in the game. 

He said he decided to buy Nokia stock before the frenzy after doing a lot of research, and he bought more AMC stock before it started to rise.

"I was looking into other companies that had the big shorts against them and AMC was another that was kind of getting a bit of mention on the Wall Street Bets Reddit," Kurnik said.

Kurnik was also surprised and upset when he saw the platforms restrict trading on those certain stocks.

"They've invented this game, we're all coming in and we're playing by the rules and at halftime, they're going back in the locker room, changing the rules halfway through and they're trying to hurt us because this is the one time they're not winning," he said.

"There has been stops of trading in general because of high volatility but rarely for a specific stock like that," Fernandez said. "The latest excuse or reason that I heard them give was they simply didn't have the money on hand to pay the processing fees for each one of those trades. I find that a little hard to believe for a company that does day-trading, but that's what they claim."

Fernandez said if there are any long-term effects, it will likely come from the hedge funds, who will add more protections to their shorted stocks.

"The key difference is that hedge funds who are putting themselves in these short positions will probably also protect themselves by putting in call positions, meaning that they'll say we'll just do an automatic buy if it gets too high," he said.

"Yeah, I think there's going to be change," Kurnik said. "What's going to happen? I don't know. We're going to have to see. It's a crazy 2020 and a crazy 2021 so far."

►Contact reporter Dennis Ting at dting@whas11.com. Follow him on Twitter (@DennisJTing) and Facebook. 

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