Billionaire investors dump $2.7B into stock shorting battle vs r/wallstreetbets

[gracchus]

@doogly

The part that confuses me about the short is that since it can go infinitely wrong, potentially, the broker must be offering the trader essentially an infinite line of credit. How could this be?

It’s not infinite. At some agreed-upon point in time the trader must return the “borrowed” shares to the broker. If the timing is off and the price is higher rather than the bet-upon lower when it’s time to return the shares the short-seller is screwed. That’s what happened to Melvin Capital thanks to the reddit group.

The stock market is legal gambling. Some people like to play riskier games than others. Here’s my earlier explanation of what happened, if it helps clarify:

@gracchus

The confusing part here is that you can borrow shares of stock, which – strange at it seems – you totally can. Some casinos lend gamblers cash or chips, too. So short selling is just another bet.

For example, I think Gamestop stock is overvalued at $20 per share, and think (i.e. wager) that its true value is $10 and will be there in two months. I “borrow” (but don’t buy) 10 shares from my broker for a couple of months and then sell the borrowed shares to someone who still thinks they’re worth $20 ea. Now I have $200 cash. Two months later, my bet turns out to be a good one – the Gamestop shares are now valued by the market at $10 ea. I buy 10 shares using $100 of that cash, use them to return the “borrowed” shares back to my broker on-time, and now have $100 in cash as profit (if the shares go lower I make more money).

Now suppose my bet doesn’t pay off and two months later Gamestop’s value goes to $70 a share thanks to those pesky reddit kids. I still have to return the 10 shares to the broker on time, meaning I have to buy them for $700 cash and have just lost $500 ($700 minus the $200 I made earlier). That’s why the short sellers in the story are so annoyed, but there’s nothing illegal going on so they’re screwed if the timing is bad. Such is life for gamblers.