Today, during the day speaking to a lot of people, lot of questions came up about the current stock market situation and what is happening there. While I explained those to some, but it motivated me to write up something about what is “short” in trading terms and the power of common mass/social media in our everyday lives. Also, this I believe is somewhat a turning point in world trading history well.
A “short” in trading is when in simple words someone borrows a stock from a broker and sellout immediately at its current price in the market. Then the person hopes the stock’s price to fall so that the same person can buy the same stock at a lower price and return it to the broker but keeping the difference which in this case is the difference in price what it remains after the stock price fell.
Example: Let me say that I want to “short” stock “A” which has a current value of $10. I borrow 1 share of “A” and sell immediately in the market for $10. So, I have $10 now in my account after the sale of “A”. Also, at the same time now I owe my broker the 1 share of “A” I borrowed. So, after I do that, the stock price of “A” fell and became $5. I now decide to ‘cover’(buy it back) my short position and buy 1 share of “A” at $5 and return the 1 borrowed share to my broker. I made $10 when I sold and only had to pay $5 to buy it back as its price of “A” fell to lower value, making my profit to $5 which is the difference in price.
But now let us say that instead of the stock price of “A” dropping to $5, goes up to $15. I still need to return the 1 borrowed share of “A” to my broker, except now it is going to cost me a lot more to buy it back. If I buy it back at $15 so I can return the borrowed share, my loss will be the $5 difference between selling at $10 and re-buying it at $15. Since the price can rise indefinitely, my potential losses as a short seller are unlimited. At some point I must buy it back to return the shares I borrowed. The more the price rises, the bigger my losses.
Now for GameStop stock, which is the talk of the market, a few weeks ago a Redditor on r/wallstreetbets noticed that a hedge fund had taken a massive number of short trades against GameStop stocks. They convinced everyone on the thread to join forces and buy as much GameStop stock as possible. This made the price rise and the hedge funds short positions on GameStop stocks started to lose billions. Their losses even probably surpassed the $13.1 B that the hedge fund was worth (not sure, you can search that up for latest news). Eventually, the hedge fund had to close their short positions and buy all the GameStop stocks back at much higher price sending the price of the GameStop stock much higher still. This is called a ‘short squeeze’ in stock market terminology (no way I am a stock market expert, just reading and learning on internet knew about these terminologies). I believe the hedge fund is declaring bankruptcy, and the Reddit thread is combing through other hedge funds with massive shorts exposure so they can “short squeeze” them as well sending the whole stock market into a little uneasy mode by using some common masses from Reddit.
You can read about what Wall Street has to say about this in the internet searching about the whole GameStop incidents.
P.S. — I am a no stock market wizard or anything, just trying to explain what this was as I read this and thought others will be interested in reading as well. All the information is gathered through internet reading and any misinformation is unintentional (pure 3rd party issue 😊 )
