Of course there is a winner and a loser in short selling. It’s not like the money just appears out of nowhere.
Anyone following what is happening with GameStop stock? Absolutely insane
- Thread starter Noodle
- Start date
Because they are investing with a belief that the share price will fall. What is difficult to understand about it?
Don't dissuade him. I'm already half done with my proposal.
It's not difficult to understand. It is difficult to see how it benefits society.
I understand that, there betting on the price to go down , when that happens where does the money come from. in layman's terms a individual investor has a stock valued at say 50 dollars . the hedge fund bets the stock goes to 40 , it drops 10 dollars I see where the investors portfolio lost 10 dollars in value. how does the guy who bet it would drop profit from that?
Are you asking how the mechanics of a short sale work?
If that is the question, the hedge fund borrows shares of the company and sells them at the market price ($50 assume 100 shares for simplicity). So they have $5000. The stock goes down to $40 / shr. they buy 100 share to return to the brokerage/party they borrowed from, profiting the $1000 difference on the 2 transactions. It can be even more lucrative/risky/complicated with options and “naked” short selling.
It blows up when the stock goes aggressively up and your short is called by the “lender” and you have to repurchase at $100 a share, losing $5000 on the two transactions.
Experts — including Warren Buffett — say short selling can be beneficial for markets
Many respected investors believe short selling plays an important role in public markets, improving price discovery and rational capital allocation, preventing financial bubbles and finding fraud.
The hedge fund is not betting the stock will go to 40. The hedge fund is just betting it will go down. Say you have ten shares and the hedge fund shorts the stock so it in essence borrows your 10 shares. The hedge fund sells those shares for $50 each (effectively allocating 10x$50 as its investment) and owes you 10 shares. If the stock drops to $40 the hedge fund buys them back for $40 each and gives you back your ten shares. The hedge fund has made $10 per share ($100).
Now, if the price goes to $75 and the hedge fund wants out they have to buy 10 shares for that price. They suddenly have a loss of $25 x 10 ($250).
thank you and krafty for explaining it. sounds more like gambling to me? the borrowing of the shares is still kind of murky though, does the original shareholder do this to raise capitol
There is an interest charge the lender receives, so shorts typically look for downward price action pretty quickly, unless they see a high probability of a significant % decrease that they are willing / can justify holding for longer while absorbing the interest costs.
I'm not saying Buffett is wrong. I trust his expertise. I'm just saying that part of it is hard for us common folk to follow.Experts — including Warren Buffett — say short selling can be beneficial for markets
Many respected investors believe short selling plays an important role in public markets, improving price discovery and rational capital allocation, preventing financial bubbles and finding fraud.www.cnbc.com
how are pink sheet stocks good for society? How is Tesla valued (relatively), higher than anything else, good for society? How are legal MLM businesses like HLF and the DeVos one good?
How is it good for society for someone to make money betting on failure?
That's the floor question here.
The SAT answer is, it's a horrible way to build a living, and unethical ways extend a living.
Also keep in mind that not only are you borrowing the money (margin) to short (because you are basically selling it first and hoping to buy it back at a lower price later making a profit.
You have to sell it to someone and since you don't already own it...you borrow it from someone else in general).
The other problem or risk is that when you 'buy' a stock, the most you can lose is what you paid for the stock.
However when you short a stock, you could lose many times what you paid.
Take this for example. Say you shorted gamestop at $10 and watched it go to $2. Say you spent a grand (so you shorted 100 shares). Nice job, you just made $800 off of your $1000 short!!!
However say you went to Mexico and wasn't paying attention and then notice that WTF....Gamestop is $350!!!!
Your $1000/100 share short is now a $34,000 loss.
That's part of the genius of this organized move. They are targeting heavily shorted stocks and buying them up which is triggering huge coverings (a cover is when they close their short position) which drives the price higher making the community insane amounts of money.
Now there are a lot of filthy rich redditors that will probably do it again, but this time have even more money to manipulate the market.
It's a brilliant scheme. Mad respect for the organization of it.
But it's bad for the markets.
The revenge is you have a long, shunned retail class of investor that has pooled their resources to manipulate the market against the multi billion hedge fund managers.
It's probably not good for the market but I don't know how the SEC can fairly curtail it.
Im guessing that retail accounts will have suppressing limits put on them.
They will figure out some way to curtail it. "Too big to fail" will rear its head again. You common folk aren't supposed to make the really big money by exploiting the market. That is a game that is only for the too big to fail class. Just like government stepped in to save their asses in 2008 when their market shenanigans about killed the economy, the government will again step in to make sure Joe Investor realizes his place is the long (and slow) game. Only The Masters of the Universe are smart enough to play games with the market.
Power to the retail investor. I hope they break a few hedge funds backs. Conservative, Inc. The corporatist wing of the GOP who feels it should be capitalism and bankruptcy for thee, and socialism and low taxes for me. Nah, there are supposed to be losers in that world and I am glad that some of them are taking it on the chin.
I disagree it is bad for the markets (in the short term yes, as the short sellers are selling other assets to cover resulting in collateral damage), this will change behavior over time and self regulate. If GameStop was shorted at 20% vs 130%, there is no story/mania etc. Going forward short interest %’s will moderate from getting out of hand due to this “threat”, which will be healthier for markets. The greed tied to the naked short selling involved with GME is similar to the packaging/selling of awful mortgages and then in turn purchasing credit default swaps, except the latter sunk the whole system and required a government bailout, in this case the greed was punished swiftly/fairly/transparently and all within the rules. I chuckle that many “free market capitalists” have bent themselves into a pretzel trying to vilify this event. If you really believe in market forces, we should never see another stock with 130% short interest.
With all of the above said, short interest is a necessary mechanism in the market, when used legitimately to identify over-valuation not justified by fundamentals. Like any other financial instrument, it is susceptible to excessive speculation .
Can someone answer me this; how much volume or cash did it take to do this to the GameStop stock? The headlines made it read that it was a couple reddit people.....it seems like it would have to be $10s of millions to pull this off?
edit: i find it hard to believe that is helpful for the markets to have companies like game stop and tesla have a stock value far exceeding their p&l or balance sheet worth.
edit: i find it hard to believe that is helpful for the markets to have companies like game stop and tesla have a stock value far exceeding their p&l or balance sheet worth.
The Reddit sub has over 3m followers. My guess is you also have a lot of institutional players that have tagged along. There are many quant based momentum shops that automatically buy stocks when they exhibit postive momentum.
Fundamentals matter in the long run. In the short term the market is just a voting machine. None of this will have any impact upon the broad market.
The short squeeze phenomenon playing out with this one is pretty extreme, and happens very rarely. But there is some precedent for it. Something more extreme occurred with Volkswagen in 2008 during a massive short squeeze. At one brief point VW became the most valuable company in the world.... even though it's business was terrible.
The Reddit group had 2.3M followers at the beginning of this, now upwards of 4.0M. I believe there are about 65M shares outstanding (avg vol 22M, yesterday had 93M, likely much higher the previous days with prices lower).
It is also hard to believe it is good for markets or companies to allow a publicly traded company to have short interest at 130%. The short interest was the danger to the market and triggering effect. In addition, the hubris of the hedge fund manager(s) that they didn’t start covering at a large percentage until Tue was an exacerbating factor.
If you are familiar with Bronx Tale, the hedge fund managers were the biker gang that busted up the bar after being asked kindly to leave, Reddit shut the door after a few days and said “Now you’d can’t leave). GME will return to its price likely in the $5-$12 range, with the company itself largely unaffected from an operations standpoint. Markets at the end of the day are to serve companies and give them access to capital, none of which has been impacted over the last 10 days.
Haha. Robinhood has shut down additional purchase of GME stock. Cue the conspiracies that an owner of Robinhood is Citadel which bailed out Melvin Capital.
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anon_mlxxvlbug9dpa
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Who knows but this insanity is only going to get worse if the hedges don't get off their short positions. It seems clear it's a game of chicken at this point.
I think it started yesterday with TD Ameritrade and went from there.
I saw the CNBC report yesterday that Interactive brokers stopped options trading on AMC, BB, EXPR, GME, and KOSS.
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anon_mlxxvlbug9dpa
Guest
Appreciate the response, and agree with the intent/purpose of being publicly traded. But i would just say, this is not happening in a vacuum. Some things, not a lot, will be impacted (e.g. someone's pension). fwiw, i really don't have strong opinions on this GME news. I didn't know the impetus and how it could snowball.
I think it's pretty sketchy. No valid reasons given. I saw a note on my TDA account on this yesterday about this. Only allowing people to close positions. Not open new ones.
Put this down as one of the few times you'll see me on the same side as The Squad.
If nothing else this will probably bring a lawsuit about Terms of Service b/c I'd bet Robinhood has something in there letting them do whatever the hell they want.
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anon_mlxxvlbug9dpa
Guest
Agreed. A broken clock is right twice a day and all.
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