Yesterday i knew absolutely nothing about any of this shit, now I'm aimlessly looking for stuff on youtube to explain as much as possible, not necesarily in order to take part in it, although I'm definitively considering
Yesterday i knew absolutely nothing about any of this shit, now I'm aimlessly looking for stuff on youtube to explain as much as possible, not necesarily in order to take part in it, although I'm definitively considering
Prefacing this with I am not an advisor, this is not financial advice.
A hedge fund, Melvin Capital, has shorted the stock for GameStop. Shorting a stock is when you borrow shares from someone to sell at the current price, intending to repurchase later at a lower price and return to the owner. The profit comes from the difference between the price when the stock was borrowed, and the price when the stock is supposed to be returned. This means that it's something used on companies who look like they're going to go bankrupt soon. But if the opposite happens, and the stock goes up in price, the losses for the people who have shorted the stock can be huge.
Melvin Capital really fucked up by shorting more shares of the stock than are proven to exist, meaning that they:
have to pay out more than the entire value of GameStop to rebuy the shares to return to their owners
are at the mercy of whoever is holding the stock when the time to return the shares comes because they are obligated to return the shares. As more have been borrowed than exist, the demand will necessarily be larger than the supply, and it's anyone's guess how high the stock price could go.
Melvin Capital has been doing a lot to at least soften the blow. r/WSB mods are claiming that a big part of new recent users have been recently made bot accounts pushing other stocks to divert users from betting on GameStop, or have been saying derogatory things about the stock's prospects. CNBC also put out a news story saying that the borrowed stocks had already been rebought and returned to dissuade people from holding or buying GameStop stock. Users of r/WSB checked, and found it to not be true. Positions were still open for 140% of shares when they looked.
Has the ship sailed on making money off of Melvin Capital's mistake? I can't tell you. I'm in for a little bit that I'm not afraid if I lose, because the stock market is all gambling.
what I got from reading wsb is that Melvin has to sell the stocks they borrowed, and they haven't done it yet, and this is what is going to drive the price even higher, and that's what is gonna happen Friday. Is that correct ?
The other way around, Melvin has already sold the shares they borrowed, and has to buy shares to return to who they borrowed them from.
My brain keeps getting stuck on the “borrowing shares” part.
As I understand it in simplified terms, Melvin “borrowed” GameStop stock from investor A, with the proviso that they sell it back (after a certain time has passed?) at the same value. Almost like getting a loan like any normal person would.
Then Melvin sells that stock to investor B. They then borrowed the stock back from investor B to resell again. So they’re on the hook multiple times for each share.
It’s almost like a regular person taking out a big loan and buying a bunch of Iraqi dinar or something expecting it to go up in value and then watching it plummet, but still being on the hook for the initial loan. Except in reverse, lol.
Is that a somewhat correct summary?
Mostly, the loan analogy is really close- In a short, you agree to borrow a stock in exchange for paying interest to the owner for the time you've borrowed it. You sell the stock you've borrowed for the current price, thinking it will go down in value later, you can rebuy it to return, and pocket the difference (minus the interest).
They don't need to return the exact share that they borrowed, just an amount of shares equal to the amount that they borrowed. It's more like, Melvin said "Hey, we want to borrow shares of GameStop, does anyone have some we could borrow?" and Investor A says "Yes, we do, here." Then Melvin goes, sells the shares to Investor B, and says again "Hey, we want to borrow shares of GameStop, does anyone have some shares we could borrow?" and another investor, it could be Investor B, or it could be a different one, offers their shares to Melvin. With the number of shares that they have shorted though, they have definitely shorted some shares more than once.