The little guy is fighting back in the stock market, too.
Normal investment strategy is that you buy a stock and when the stock goes up, you sell for a profit. While you still own the stock, the company will pay dividends that are based on the price of the stock. You risk losing your investment, but that is the bottom. Your profits can go up indefinitely. It is to your advantage for the company to do well because the stock price will go up.
Short selling is the opposite strategy. You borrow a stock from someone who owns it, then sell the stock at the current price, promising to buy it back at a later date when the price has hopefully gone down. In this case, your profits are fixed at some fraction of what you spent, but your loss potential is indefinite because the price you must buy the stock back can be any amount higher than what you spent. It is to your advantage for the company to do poorly or even go out of business because you are counting on the price going down.
Well, it seems small investors are fighting back against investors who short sell stocks and then try to make the stock value go down, shitting on all the serious investors.
Now let’s look at Game Stop stocks. Game Stop is a chain of video game stores that depend on people buying or renting game cartridges. It’s the Blockbuster of video games and is definitely in the sunset of life as an industry.
Game Stop stocks were in lots of big investors short sell portfolios. Game Stop was selling at $4 a share a few days ago. Shares were selling at $380 a share at 11 am NY time today.
What happened?
Long term holders of Game Stop started churning the stock to make the price go up. Whenever the price of a stock goes up, the stockholders can make a “margin call” on the stock. That means they call in all loans against stocks. Short sellers have to come up with the difference of what they bought the share at and what it is going for now. Now, since the short sellers were expecting to make a profit at somewhere less than the $4 a share they borrowed it at, they would have borrowed lots of shares. LOTS of shares. Now they have to come up with $376 a share that they borrowed. This will repeat until they cut their losses and bail on the shorts they hold.
This is happening right now
How much money did the GameStop shorts lose?
The losses appear to be tremendous. As of Monday, shorts seemed to have lost $3.3 billion betting against GameStop this year, according to MarketsInsider. About $1.6 billion, or about half, of those losses happened on Friday when the stock jumped 51%.
C/Net article