Can someone explain to me how hedge funds bankrupt companies?
In: Economics
You gather loads of money, take loans on that money to get more money, buy stocks of a company let’s say for 100 and options to sell the stocks of that company for a fixed price idk let’s say 100. By buying the stocks you pumped it’s value as people will see that this company is “in demand”, so it must be valuable let’s say it rises to 200. And then sell off all your stocks in that company for the pumped price. Afterwards, the company will drop in value because people see that investors are fleeing the company, so there must be something wrong with them, let’s say it drops to 50. And when they hit the low point you buy back your stocks full fill your trade option, so you buy it for 50 and sell it for 100. So the result is:
result = -100 (to buy it) + 200 (for selling it) – 50 (to buy it back) +100 (to fulfill the option) = +150
So you get +150 for each share for essentially nothing. Now if you hit the company really low on their way down, they might not be able to get loans anymore, their suppliers might want to see money upfront and don’t trust their credit score and whatnot and so they might not be able to fulfill their contracts and if the company didn’t have the means to sit it out and have the market realize that this was all a scam and that the value of the company never actually changed from 100, then they might go bankrupt before they would “miraculously” recover from that.
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