General Discussion
Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsI know little-to-nothing about stock trading. Can someone please give me the "Dummie's" version of
what happened this week with the GameStop situation?
I know the basics --- stocks are bought and sold. What I don't understand is how stocks can be "bet against".
Thanks in advance!
Yavin4
(35,453 posts)What that means is that you feel that a stock will be worth less tomorrow than it is today. So, you enter into an agreement where you will borrow the value of that stock today and in return, you will pay back that stock at its value in the future.
For example, a stock today trades at $50 a share, and you take a short position. You borrow the $50, the price of the stock today, with the promise that you will repay the stock at its value in the future. Now, it's a week later, and the stock now trades at $10 a share. You re-pay your loan of $50 with the value of the stock which is now only $10. In essence, you made $40 profit.
Hedge funds and other big money types short stocks at times to drive down their prices, so that they can do what I just explained on a massive scale. Most of the time, this happens because a corporation is facing difficult times ahead,
Game Stop, a brick and mortar retailer, is one such struggling company. Given the pandemic and the overall decline of retail, it's a prime candidate for a short sell. Borrow the value of its stock today because it will be worthless in the future.
Here's where that Reddit community comes in. A bunch of day traders starting buying up Game Stop's stock which made the value of the stock rise. So now, those hedge funds that had short positions in that stock are facing huge losses because in order to settle their short positions, they have to pay back more money than they originally borrowed because the stock price went up, not down.
cate94
(2,816 posts)PoindexterOglethorpe
(25,919 posts)Thank you so much for that.
Vivienne235729
(3,391 posts)Wait. I do have a question. Do they (the hedge fund people) have a certain amount of time they have to pay back the short stock or can they just wait until it sinks again?
uncle ray
(3,157 posts)disclaimer: layperson here.
some shorts can have a defined deadline. some can be open ended, but you are paying interest every day your short is open. this is where it gets interesting with the GME situation. some hedge funds borrowed more shares than actually exist. they MUST find shares to buy to close out their short positions. the shares simply do not exist to do that. wallstreetbets is exploiting that situation, buying and HOLDING shares so there are even fewer shares available for those shorting the stock to buy. you now have to pay the astronomical price being asked, and then resell the stock at a loss so your other hedge fund buddies can close out their shorts. many of the retail buyers have dug in their heels and say they will NEVER sell. the MSM is not doing a great job on covering this. this is 100% about sticking it to the hedge funds at any cost.
Vivienne235729
(3,391 posts)I saw on some article that bought all these shares are incredibly brilliant. Who would have thought to do this?
fishwax
(29,149 posts)They short sold so many shares that there were very few shares left on the market to buy. So when the demand increased (as a result of the redditors buying in) the supply was very small (as a result of the hedge funds over-shorting), and so that put tremendous extra upward pressure on the price.
A HERETIC I AM
(24,380 posts)You actually borrow the shares themselves.
Every Margin Agreement out there specifies that shares held under such an account are subject to this borrowing. This statement is not accurate;
Thats not the actual mechanics of how these trades operate. They have to do a buy to cover in order to settle the trade. THAT is where the loss comes in, because in the worst case of GameStop, their buy to cover was over $300/share instead of $6.
You are making it sound like it is a loan of money. Its not.
Yavin4
(35,453 posts)and not get too specific about the actual mechanics of how it works.
Borrowing the actual shares or borrowing the value of the shares is a distinction without much of a difference. In the end, you are taking on a liability that you have to pay back at the value of the shares in the future.
My goal was to explain the concept: take on a liablity of the value of an asset with the promise to pay back that liability without getting too much into the details of the mechanics which can confuse people.
My question to you is, why are you so hostile in your post? We're not in class here. I don't understand why your post has such a nasty tone to it.
smirkymonkey
(63,221 posts)I appreciate your explanation. Pay no mind to someone who is trying to get into a ridiculous pissing match with you.
A HERETIC I AM
(24,380 posts)Pissing match?!?
Fine. Yavins explanation of how to sell short was spot on perfect.
He was right and I was out of line.
AmyStrange
(7,989 posts)Progressive Jones
(6,011 posts)You said that one would borrow the value of a stock today, and pay back the stock's value at a later date.
Is the borrower in this arrangement being lent cash against stock that the borrower already holds, or are they actually borrowing shares of the stock?
Did the day traders all just coincidentally happen to notice what was going on with the GameStop stock, or was this a
sort of organized thing?
Yavin4
(35,453 posts)it's still a form of a liability that has to be paid back at a particular value in the future.
This was an organized effort by the Game Stop day traders to push the value of the stock higher which meant that the current liability of the holders of the short grew much higher.
ADK
(83 posts)You sell a security you do not currently own at a high price, betting that you will be able to repurchase the security later at a lower price to return to its owner. This is a strategy largely undertaken by institutional investors. There is a pretty good discussion at https://thismatter.com/money/stocks/selling-short.htm
The issue here is that a large number of small retail investors using Robinhood to affect their trades allegedly used social media a Reddit discussion group in particular to collude and coordinate their stock purchases to create a seemingly large demand and artificially drive up the price of GameStop and AMC stock, despite the fact that the stocks fundamentally should be declining in value. Some retail investors sold the stock to make astronomical profits. The large institutional investors that had been selling short started to take a bath, and Robinhood ceased allowing retail investors from trading in the stock, while institutional investors were allowed to continue. In other words, the market was manipulated by both the retail investors and then by Robinhood, and there are a number of issues with potential violation of federal securities laws on both sides that are the subject of ongoing investigations. The underlying question seems to be what effect social media can have on what is supposed to be an efficient market. Its similar to the discussion regarding Facebook and the spread of false information in many respects.
Here is an WSJ article that summarizes the GameStop/AMC issues. https://www.wsj.com/articles/gamestop-stock-reddit-and-robinhood-what-you-need-to-know-11611960243
jmowreader
(50,569 posts)When you short stocks, you rent the stock from your broker and sell it. Then one of two things happens; it goes down enough to give you the profit you want, at which time you buy it back and return it, or it goes up and your broker calls it in so she can sell it herself. The ideal as far as youre concerned is for the company to go out of business, which means you get to keep the entire sale price. (This is probably what the shorts had in mind for GameStop.)
LAS14
(13,789 posts)... I looked assumed that I knew what shorting was. AND how little investors could affect big investors. AND what Game Stop was.
TlalocW
(15,392 posts)"Trading Places" starring Eddie Murphy and Dan Aykroyd... kinda?
TlalocW
AmyStrange
(7,989 posts)PersianStar
(67 posts)PurgedVoter
(2,220 posts)I borrow a bag of sugar from you because I know someone who will pay the current value for it and I suspect the price of sugar will go down.
If sugar goes down in price then when I buy a bag to give back to you next week, I made a profit. I only do this when I think I have a sure bet. If next week the price of sugar goes down I can profit by the reduction of price. If however the price of sugar goes up, I am on the hook and have to pay the new value.
If the sugar I borrowed from you cost five dollars, then the most I can possibly make is five dollars if sugar becomes free. If however that amount of sugar now costs a million dollars I loose five dollars less than a million dollars.
So the potential loss vs potential gain of shorting stock makes it dangerous. It also makes me, as the snake that is using your sugar to make money, interested in having sugar go down in value. This means that by allowing shorting to be used as an investment tool, I allow a bias that profits on the failure of business. Since the creation of stock exchanges was based on the theory that it would help with job creation and the success of businesses, this is dirty pool.
This is the problem with stock exchange in general. There are ample opportunities to make a profit off of the misfortune of others. There are even more dangerous things that these high dollar markets can do.
Now that water can be speculated on in the commodities market, a person can make a fortune by manipulating the availability of water. This puts the common man at risk. It puts crops at risk, health at risk. Water being put on the commodities market means that someone rich might just want to persuade officials to not make good decisions.
Progressive Jones
(6,011 posts)progree
(10,929 posts)When I sell 1000 shares of XYZ corporation short, I am borrowing 1000 shares from a broker and then I sell those shares on the open market. If the current price is $30/share, I get 30*1000 = $30,000 from the sale that I put in my pocket. Cool.
But I have to eventually give the shares back to the broker. I don't know what the time frame of that is, I think a few weeks.
Remember: He who sells what isn't his'n, must pay up or go to prison.
(the female and gender neutral versions of that don't rhyme as well).
Anyway, the time comes when I have to give 1000 shares back to the broker. Let's say at that time, I can buy 1000 shares for $10/share on the open market and do so, at a cost to me of 10*1000 = $10,000.
And then I give the 1000 shares that I just bought to the broker.
Cashwise, I pocketed $30,000 but had to spend $10,000 to buy back the shares, leaving me with a $20,000 profit. Life is good.
But what if instead, when it came time to buy the shares, the price was $40/share rather than $10/share? Well I'd have to pay $40,000 for the 1000 shares. And then I give those 1000 shares to the broker.
Cashwise, I pocketed $30,000 but had to spend $40,000 to buy back the shares, leaving me with a $10,000 loss. Life sucks and then you die.
Edited to add: If A HERETIC I AM corrects this, he is almost certainly right since he actually worked as a broker.
A HERETIC I AM
(24,380 posts)And your explanation is more accurate than Yavin gives above, because he suggested the process involved borrowing the value when in fact, you do borrow the shares as you said.
With the proliferation of online trading platforms, people can see this for themselves if they have an account, because the option Buy To Cover will be among the available transaction types.
As I mentioned above, the actual shares used for this are held in Margin accounts typically. A given broker dealer will have access to those shares, should a retail customer choose to short an issue.
Yavin4
(35,453 posts)Short positions can also be achieved through futures, forwards or options, where the investor can assume an obligation or a right to sell an asset at a future date at a price that is fixed at the time the contract is created. If the price of the asset falls below the agreed price, then the asset can be bought at the lower price before immediately being sold at the higher price specified in the forward or option contract. A short position can also be achieved through certain types of swap, such as contracts for differences. These are agreements between two parties to pay each other the difference if the price of an asset rises or falls, under which the party that will benefit if the price falls will have a short position.
https://en.wikipedia.org/wiki/Short_(finance)
The concept is that you are "renting", "borrowing", or gaining the value of an asset today while taking on the liability of paying back said asset at a future time at the value of that asset in the future.
Again, why are you so hostile? Is it because I got some praise for my post? Is that it? Are you that petty?
A HERETIC I AM
(24,380 posts)I am fairly familiar with the difference between having a short vs. a long position, and I know they come in many shapes and sizes, but I appreciate the Wikipedia cut and paste.
You think Im being hostile, merely because I pointed out an inaccuracy in your explanation?
Wow.
If you had more confidence in your readers instead of assuming that they needed to have an explanation written for a layman, I wouldnt have said a word.
I dont give two shits if you got praise for what you wrote, but if you are going to give an explanation on a question that has an easily discoverable answer, why dumb it down?
The OP asked a fairly simple question, one that is easily researchable and has a SPECIFIC answer, and your explanation was inaccurate. How is pointing that out deemed to be hostility?
Never mind. You win. You are correct and I was out of line.
Have a good day.
Yavin4
(35,453 posts)That's why I used laymen terms.
Also, my post was not inaccurate as I explained the concept of short selling not the actual mechanics of shorting a stock. You failed in your attempt to show how my post was "inaccurate".
"Renting" or "Borrowing the value" of a stock is the same damn thing. Whatever term you use, your account shows a liability when you enter into a short sale.
A HERETIC I AM
(24,380 posts)Depends on a couple factors, well described in this short article on Investopedia
I read an article years ago about short positions on ENRON (remember them? LOL) that were held for an extended period and exercised at one cent!
progree
(10,929 posts)of unrelated option or another that I read about.
Yes, I remember ENRON. I used to work for an electric utility (Northern States Power, now Xcel), but that was before the wild west craziness in the energy sector that culminated with ENRON's collapse.
The brother of my boss was involved in starting NRG, a spinoff from NSP and a similar company to ENRON in many ways. Prior to the spinoff, the NRG unit dragged NSP's stock price down to a ridiculously low level, so I bought a whole bunch, doubled my money in a couple of days, and sold. (The only individual stock I ever bought other than automatically thru the ESOP. Wish I had held on for a lot longer).
mopinko
(70,278 posts)that's what stock option are about.
portfolio managers are always buying options on stocks they own. that's called a 'put'.
but you dont have to own them, that's called a 'naked put'.
it's up to the buyer to decide if they think you are worth enough to cover a naked put.
if someone wants to take you down, they'll buy your naked puts hoping to screw you.
options only cost a few pennies on the dollar, and the price depends on the outlook for the stock.
they come due quarterly, and at the end of the quarter they can be allowed to expire by the buyer, or they can be 'called'. the vast majority of options just expire.
PurgedVoter
(2,220 posts)Progressive Jones
(6,011 posts)BlueNProud
(1,048 posts)edhopper
(33,649 posts)beat a few greedy, corrupt money managers at their own game.
BlueNProud
(1,048 posts)edhopper
(33,649 posts)Arthur_Frain
(1,866 posts)Dumpy's incels, and gamer dweebs, most of whom never saw action if it wasnt on a video screen.
But then Id include neckbeards, fake patriots, people who understand nothing about the constitution, and idiots in that crowd too.
Turin_C3PO
(14,099 posts)progressive gamer dweebs as you call them, my brother and his friends among them. To be sure, theres a loud asshole segment of MRA/Trumper/INCEL types but its a mixed crowd like anything else.
Arthur_Frain
(1,866 posts)Im one in fact. Not ballsy or with enough expendable income to spend any time doing what wallstreetbets gamer dweebs and incels are doing, but Ive been watching their drama against Wall Street all month.
Progressive Jones
(6,011 posts)dalton99a
(81,656 posts)marie999
(3,334 posts)Someone else should explain what a margin is. We have a 50% margin, which means we can buy more stock by borrowing from our broker.