Short-selling. Not just for billionaires anymore

A lot of us have investments, RRSPs etc. Most of us let whatever institution houses our investment, run it.

At least I do. The stock market, I simply do not understand. I have friends who play it religiously, who read the financial pages, and buy and sell. But not me.

Which is why the brain bend I’ve had to endure to research and write this column is astounding.

Hold steady, I am about to explain the GameStop brouhaha.

As explained by GameStop for Dummies: Here’s the gist: Wall Street has witnessed an uprising of amateur investors who have caused rich people to lose lots of money.

So here’s the deal. There have always been short-sellers on Wall Street. These guys operate hedge funds, and become immensely wealthy, by short-selling stocks.

Basically, short-selling is betting that a company’s stock price will fall. The investor “borrows” a stock or security and sells it on the open market, according to Investopedia. The plan is to buy it back when the price drops. Then the investor returns the stock, pocketing the profit.

As explained by Desjardins Online Brokerage, when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage’s own inventory, from another one of the firm’s customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later you must “close” the short by buying back the same number of shares (called “covering”) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.

A lot of people have become quite rich over the years short-selling.

But in the past couple of weeks a short-selling frenzy has erupted. It all began with a group of Reddit users in a forum called WallStreetBets deciding that was good for the goose (hedge fund millionaires) was good for the gander (the common Reddit user).

The group of small investors on Reddit discovered that one of the stocks being shorted by hedge funds was in a company called GameStop.

GameStop is a video game retailer feeling the pinch as COVID has sent more people shopping online rather than their stores.

The small investors bet that the billionaires got it wrong and began to buy GameStop shares. That ignited a frenzy and the shares increased in value up to 1700 per cent.

They tried other stocks too. And the strategy worked again. Some of the small investors in the sub-Reddit made millions. Other made enough to pay off student loans or purchase their first home.

But suddenly the rich hedge fund managers were clutching their pearls in horror. Not fair, they cried! Only rich people can short-sell!

And indeed, it is reported that GameStop shares alone cost Wall Street short-sellers $5 billion, as they were forced to buy back the inflated shares.

Some online brokers began to restrict trading. Many of the small time online investors were using a stock trading app called Robinhood. As GameStop shares rose and Wall Street lost money, Robinhood suddenly banned users from buying the shares.

Sub-Redditors were furious, though the Robinood people said it was because there was a “liquidity crisis”. I bet there was.

And then last week, the stocks began to fall and the feverish buying began to die off. As of Monday, February 8, the stock price had fallen 80 per cent, mainly due to the hedge funds buying back their borrowed shares and eating the loss.

Are you confused yet?

It has been quite the saga. Will it teach the rich hedge fund managers a lesson? Well, there is current chatter that this whole episode has brought an epiphany. Hedge fund companies have discovered that people hate them. Do they plan to never short-sell again? No. But they do plan to launch a PR campaign explaining all the good they do. I can’t wait to hear it.

Meanwhile, the amateur investors have discovered that, as a group, they have amazing power. One wonders what they will think up next.

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