Milwaukee company stock skyrockets following internet market phenomenon
MILWAUKEE (CBS 58) -- Stock for the Milwaukee-based manufacturing company Koss (KOSS) had been hovering between $1 and $3 per share for the better part of the last five years.
On Wednesday, Jan. 27, that same stock was trading at $89.98.
There were no significant changes to the company.
The same new market trend catapulted stock for retail video game selling company GameStop up 1,700 percent since December. The situation has caught the attention of the White House.
“Our economic team, including secretary Yellen and others, are monitoring the situation,” White House Press Secretary Jen Psaki said.
How is this happening?
It starts when hedge funds bet against companies by “shorting” stocks. The hedge funds buy stock in companies they think will decline, aiming to sell those stocks before they actually own them. Hedge funds essentially borrow the stocks from brokers. They agree to sell them back, with the goal of being able to purchase those stocks at a lower price when it's time to pay up.
Marquette professor Margaret Hughes-Morgan said there is one major catch.
“The problem is, you can’t leave those shares outstanding for as long as you want. Your broker will do what’s called a margin call. And they’ll want those shares back so that they can sell them to somebody else.”
A group of internet users made them pay.
The Reddit group "WallStreetBets" had more than 4 million subscribers as of Jan 27. A group of retail traders, fueled by cooperation from the group, was able to buy enough stocks of companies like GameStop, it forced hedge funds to purchase those stocks back at the artificially increased bets to pay back their debts.
“What is -- what’s so fascinating about it, is the little guy is sticking it to the man,” Hughes-Morgan said.
LPL financial adviser Shawn Quella said with user-friendly trading apps like Robinhood coming to prominence, combined with that social media presence, the situation snowballed.
"Individual investors hop on the train, if you will," Quella said.
So a company like Koss -- despite no major change – sees its stock value increase exponentially.
“Fortunately for Koss, they made it on that list, they made it on that Reddit forum," Quella said. "If I’m Koss, I’m going to sell shares tomorrow.”
Hughes-Morgan said there is a downside for those who decide to join the phenomenon. The hedge funds can afford to lose a shorted stock battle. They have done so many times, but they win more than they lose. A novice investor could lose more than they can afford.
“This is not investing, This is gambling. Sometimes it works out. More often than not, it doesn’t.”
But the hedge funds have never faced this level of internet coordination before.