The idea of this is fascinating, and while the focus of this article from The Verge is Game Stop - a place that I once patronized but stopped because I no longer found used NES games for sale there - I see this has affected companies like AMC Theaters and Bed, Bath & Beyond. All the same I'm still not clear on the concept of a short and when I hear of a short in a financial sense I think of the film The Big Short which sought to explain the mortgage crisis of the late 2000s.
Here's a brief explanation:How r/WallStreetBets gamed the stock of GameStop https://t.co/4Ld6nxgbHf pic.twitter.com/4rDh4HiDBl
— The Verge (@verge) January 28, 2021
If you think GameStop will fail and the stock will go down, or even that the company will go bankrupt, there’s a way to make money on that. Typically, this is done by short selling — a practice where you borrow shares for a fee and sell them for (ideally) a high price, then buy them back at (ideally) a lower price to return them. This can make you a lot of money, especially if the company goes bankrupt and you don’t have to return the stock!
The thing about short selling, though, is that you lose money if the stock goes up, and your losses are potentially infinite if the stock keeps going up. There are several other bad things that can also happen, such as an increase in fees or the original investor wanting their stock back. This means some shorts will be forced to “cover,” or buy the stock back at a high price, which sends the price even higher.
Right now, more people are betting against GameStop than betting it will succeed. “Short interest is 71.2 million shares, while GameStop has only 69.7 million shares outstanding,” Matt Levine of Bloomberg points out. Some people will notice that kind of thing and think, Hm, this stock is prime for a short squeeze! Basically, because so many people are short, it may be possible to trigger a chain reaction where you buy enough stock to send the price up, forcing some shorts to cover, sending the price up further, forcing more shorts to cover, and so on.
For retail investors, this process has gotten easier and cheaper because of apps such as Robinhood. In addition to letting you buy and sell stock, you can easily buy an option for stock, instead of the stock itself. If you are feeling confident in a stock, you can buy a call option — which lets you buy a stock at a specific price on a specific date.
My head is spinning on this explanation. However, by my eyes it's almost a scam. For those smart enough to play this game, well done..
2 comments:
I've been following this story myself and, like you, I'm not entirely clear on all the concepts. But I'm sure it is a scam, even though I found myself rooting for the Reddit day-trading nerds just like movie audiences were expected to, and did, root for Eddie Murphy and Dan Aykroyd at the end of Trading Places.
According to one account I heard on the radio this morning, several of the Redditers have made millions, while hedge fund managers, who were in fact betting against GameStop's survival, have lost $14 billion.
The problem is that the billions lost by the hedge fund managers did not necessarily come from the deep pockets of Jeff Bezos or Bill Gates -- rather, their losses will probably impact, at least in part, the retirement accounts of millions of ordinary Americans. Or at least that's how it will work out when the accounts are settled.
And while I don't entirely understand the mechanism and strategy and tactics of the short squeezers or the intricacies of the financial instruments involved, I do know one thing with clarity and certainty: Not one widget was made, not one light bulb, not one head of lettuce. Nothing of practical or lasting value resulted from these transactions. China still makes nearly everything we use and makes real money on every sale.
I also know that the American economy crashed and burned in 2007 and 2008. I know that none of the bankers who drove the economy off the cliff with their reckless derivative trading -- based on subprime mortgage loans that had no chance of payment once the housing bubble burst -- went to jail. I know that the government bailed out the banks -- too big to fail -- and I know that the stock market recovered.
But I don't think the actual economy has ever come back. Even before the Pandemic -- I saw empty storefronts and abandoned buildings everywhere I went. Businesses kept right on closing and people kept losing their jobs. And what jobs have been 'created' to replace them?
I think "reforms" will come from this GameStop incident. But my guess is that the "reforms" will protect institutional traders, all in the name of preventing unrealistic market evaluations of particular stocks... except when institutional traders want to bid up stocks to unrealistic values, as in the case of Tesla. Tesla builds and sells nifty cars, but not so many as to make it the most valuable car company in the world! No, these reforms will make it harder for outsiders to crash in... and cash in. And the "reforms" will not help even one tangible product to be made in America instead of China, or create one new middle class job.
Am I being too cynical here?
I don't think you're being too cynical. You're painting a very realistic picture here. What you discussed here is probably being discussed somewhere. For example insiders want to keep outsiders out. That's definitely being discussed.
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