Short selling is a fairly simple concept—an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender. Short sellers are betting that the stock they sell will drop in price. The difference between the sell price and the buy price is the profit. Remember this as we go ahead.
Melvin Capital , a large hedge fund started shorting Gamestop stocks, when it’s price was at $15 , anticipating that the stock price would go down further due to covid. The company closed 462 stores in 2020, with plans to shutter more than 1,000 stores total by March, so it was struggling and stock prices were bound to go down. But the reddit community of r/wallstreetbets had different plans. They started pumping money into the stocks in order to raise the value of the stock putting pressure on the short-sellers. Many Reddit posts suggested that this was a way to punish hedge funds that were seeking to profit from a company’s troubles
When the price of a heavily shorted stock soars, short-sellers are forced to buy the shares back at a higher prices to close out their positions, pushing the stock price even higher and this is called a shorting squeeze.The shorting squeeze worked and shorting shares in GameStop cost hedge funds billions of dollars. This is perhaps the first time that ordinary investors were able to incur such huge losses on huge funds. It is also important to note that many ordinary investors also had to suffer losses. Gamestop is a very volatile stock. GameStop stock price was 347.51 on January 27, 2021 which is a lot, compared to its initial public offering of 18,055,555 shares of its Class A common stock that was priced at $18.00 per share. The value of it while writing this is around $260 , so if for instance you invested a large sum into the stock when it was at an all-time high with the state of it right now, you would be operating at a loss.
Gamestop brought about both positive and negative changes. On the positive side, Citron Research has said it will now focus on investing in companies with potential to grow rather than betting against those it thinks have major problems. Other funds have cut their short positions too. And on one side, that could be construed as both positive and negative, the hype around gamestop has introduced many people to investing. It is good for those who are financially savvy enough to trade for themselves , considering all the factors as it brings about a new opportunity to, but it is very risky for those who are making bets and investments they don’t understand because of new age investment gurus offering unreliable tips on various social media platforms.
Any time you are purchasing stock because of hearsay, or you are not grounded on economic reasoning, you are not investing but rather, speculating. Speculating in the market can wreck an individual’s finances and negatively impact the market and the economy.
The recent events have definitely introduced a lot of youth to the concept of investing in shares as an alternative to investing in gold or property. Always research and plan before taking any decisions and let us know if you’d like another post about investing!
SOURCES
https://www.moneycontrol.com/news/world/explained-what-is-happening-with-the-gamestop-stock-the-reddit-factor-who-wins-and-who-loses-6406631.html
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