You are in luck my friend
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That’s a good video about the mechanics of short selling and the narrative about the Reddit r/wallstreetbets vs hedge fund story.
Basically a bunch of smaller traders noticed that GameStop was at $3 a share but 140% of the shares were sold short. It meant there was somebody with a huge exposure. Once they started pointed it out and the stock started rising, it took on its own momentum.
The problem is that GameStop is probably not a $3 stock, but neither is it a $300 stock. (That’s where it is now in pre-market trading)
Also looking at some of the stock message boards and twitter on this has a very conspiracy theory feel. People buying now expecting it to go to$1000 and are making rationalizations about how good the company is. It is FOMO for people jumping in now. A lot of people are going to lose money. They’ll be the collateral damage of taking out a hedge fund or two.
Full disclosure: I bought a put option which limits my risk but I expect GameStop stock price to fall in the next few weeks.
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I don’t really understand the stock market.
Why is it legal to buy stocks that are bets a company will fail?
It doesn’t make sense to me
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I can offer you a great deal of Tulip Bulbs!
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Yup, I’m firmly on the fence here. It’s damn hard to sympathize with a company whose business is to dismantle other businesses. On the other hand, edge lords in coordinated groups can do a lot of collateral damage.
And there it is. A bubble that pops almost as fast as it began. As always, the people in on the ground floor can make a tidy profit while bailing out early (don’t get greedy!), while the latecomers are left holding the bag. That seems to be the way with any kind of investment-related bubble. By the time an investment trend makes the news, it’s already too late to join in.
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It’s what plants crave!
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Bed Bath & Beyond did it for me.
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“I don’t really understand the stock market.”
Short selling a stock really has to do with the difference between a stock broker (who holds portfolios of stocks, and brokers the buying and selling deals on the part of individuals and companies), and a trader, who buys and sells all types of investments (commodities, equities, fixed income, derivatives, forex, futures, music royalties, credit card debt, and of course, stocks) for a firm that they work for, using the firm’s money. I’m simplifying things here because there is a lot of overlap, but that’s the crux. The broker knows a stock is going to go down, but doesn’t know (or doesn’t want to know) by how much. They just want it off the books so their portfolio (and clients) don’t take a huge hit. The trader knows it is going to fall too, but they think they know by how much, and how fast, and they also know someone who will buy it.
“Why is it legal to buy stocks that are bets a company will fail?”
To be blunt (and please accept my apologies if I sound rude), because stock trading is the business of buying and selling. Anything. Brokers and traders make money not only on the investment, but also on fees and whatnot. Brokers make more money brokering deals, while traders make more money on the trade. So a trader is more likely to want to trade, while a broker just wants in on good deals, and out of bad deals.
The “big idea” behind short selling is that a trader isn’t buying the stocks that they are betting will fall, they are borrowing them. This is important later on, but the graphic below lays it out nicely (thanks The Balance). The broker wants the bad stocks off their portfolios, even if it is only temporarily, so they loan them to the trader. The trader finds people who want to buy the falling stocks (I won’t get into who wants to buy falling stocks, that’s a whole other can of worms). The stocks lose more value, the trader buys them back at an even lower cost, then returns them to the broker and voila! Money is made simply by passing the same assets back and forth.
However, this is high risk/high profit. The big “if” in this case is the “bet” that doesn’t make sense to you: why would anyone do this? Because the broker makes money off the fees and interest from the loan (just like borrowing money for a house, a trader has to pay interest against the value of the stocks back to the broker), the trader makes money off the fees selling the stocks to someone else, and then makes money buying them back at an even lower cost and (another important point here) returning them to the broker from whom they borrowed them from. The trader and their firm must return the stocks they borrowed, or pay for them. So the “short sell” has to not only tank, but tank big. If it tanks huge, it’s a big payday, the trader gets to keep a lot of the money they made when buying back the stocks they have to return because the share price is now so low.
But, if the stock doesn’t fall that much, or (god forbid) it actually gains in value, the trader bears the brunt of the loss. It now costs more to buy back the stock that they must return to the broker they borrowed it from. The broker doesn’t lose money, in fact, they make money because the stock they get back is now worth more. The client/buyer doesn’t lose money, they make money because the value of the stock they bought went up.
And that’s the queer part about this whole thing. The value of a falling stock can be stabilized, or (in this case) go back up because everybody knows that the trader who borrowed the stock has to buy it back. An elephant might look a lot more attractive to own for a short time if you have a guarantee that elephant is going to sell, right?
So all these trading firms took huge short selling positions on a number of publicly traded companies, buying big to cash in on their implosion. Only this didn’t happen. A huge number of small investors rallied and bought these failing stocks, raising the price way up, and putting the trading firms in a place where they would incur monster losses.
Hope this helps explain things.
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Thank you for the incredibly thorough answer.
It just seems to me like making money moving money around.
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Apparently the current financial media spinstorm is calling everyone from WSB to RobinHood users a cartel and other mean words. Plus, the billionaires are trying to sic the alphabet agencies onto them. I expect some harassment but I doubt any arrests will be made cause once WSB tries to cash out they valuation will dry up. But the disruption proves that if you wanted to do something like this as a form of anarchistic/illegalistic action it does work. The real problem is to keep coordination as secret as possible until its too late to do anything about it.
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Yes, it is becoming ever more true as more and more money spends its time shuffling around Wall Street and not going back out into productivity improvements. Stock prices are high enough that the underlying profitability of individual companies is not as important as the aggregate of how much money gets shoveled into Wall Street by the increasing concentration of wealth.
The Federal Reserve’s practice of juicing Wall Street with excessively low interest rates and round after round of bond purchasing just accelerates income inequality and further divorces Wall Street from the real economy of making stuff and providing services.
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This is the insane part; it’s not even money, it is making (and losing) money solely on moving around the promises of the idea of making and losing money.
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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?
Yeah buying stocks can mean two things - I want to buy a share in a company because I think that company will do good business, or I want to buy a share in a company because I think that the price of a share will go up. These are meant to be closely related, but this has become less true in a lot of cases. Something like the former is probably necessary in any post-medieval public economy, but the way we conduct business around the second has become perverse. So this is a bit of a pickle, I’d say.
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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:
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People don’t say this enough…
Because rich people, hand waving, job creators, etc… who fucking knows?
Yes.
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This is an excellent example of why shorting a stock is always risky. Your upside is limited, but your downside is potentially infinite.
And, in this case, the short-sellers got the fundamentals right – Gamestop’s a dying company, and shorting it is a rational decision – but they’re getting massively screwed by the rise of share prices which could not be predicted by any analysis of the company itself. Like Keynes famously said, the market can stay irrational longer than you can stay solvent.
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The timing isn’t infinite, but the amount that they could potentially owe the broker is unlimited, is what I meant.
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Oh, definitely. That’s how the degenerate gamblers at Melvin Capital screwed themselves. There’s always some loan shark willing to take a risk on them.
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I believe that this is exactly why there needs to be a narrative cohesion, a moral cohesion that unites retail investors/raiders. The only way this all works is if the impulse to sell is overcome. If the orchestration is in secret, people will go to jail and it will stop. They will be too easy to target.
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And especially screwed if you owe the broker more shares than are currently available to buy on the market @ $700. You have no direct way to cover your bet, and are naked. That’s when it gets really expensive, and you have to offer more than $700 to shake loose more shares, further driving up the price.
And if anyone thinks this is crazy and not connected to reality, out in the real badlands, other people are probably making huge derivative side-bets on this that don’t involve any actual stock.
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