There’s a lot going on in the stock market this week and both and Reddit in general are inundated with questions about it. This is an opportunity to ask for explanations for concepts related to the stock market. All other questions related to the stock market will be removed and users directed here.
How does buying and selling stocks work?
What is short selling?
What is a short squeeze?
What is stock manipulation?
[What is a hedge fund?](https://www.reddit.com/r/explainlikeimfive/comments/l6ptb7/eli5_what_is_a_hedgefund/)
What other questions about the stock market do you have?
In this thread, top-level comments (direct replies to this topic) are allowed to be questions related to these topics as well as explanations. Remember to follow all other rules, and discussions unrelated to these topics will be removed.
**Please refrain as much as possible from speculating on recent and current events.** By all means, talk about what has happened, but this is not the place to talk about what will happen next, speculate about whether stocks will rise or fall, whether someone broke any particular law, and what the legal ramifications will be. Explanations should be restricted to an objective look at the mechanics behind the stock market.
EDIT: It should go without saying (but we’ll say it anyway) that any trading you do in stocks is at your own risk. **is not the appropriate place to ask for or provide advice on stock buy, selling, or trading.**
In: Economics
For people that don’t understand **shorting**; here is my best explanation at it (this is heavily inspired by a YouTube video)…
**Shorting is when you think a company is going to do badly so you borrow that company stock from a broker and promise to pay them back later.**
Here is a Non-Stock Example:
Imagine that you thought **apples were going to go down in value** and they currently cost **$1.**
You go to a shop keeper and ask if you can borrow an apple which you will give back later.
You borrow the apple from him and sell it someone for $1 and then wait for the price to change. If the price goes down to 50 cents then you can buy 2 apples for a dollar. You go back to the shopkeeper and give him back the apple.
**He has an apple back and you have an extra 50 cents.**
**In stock market terms you have shorted them apples**. Now replace the apples with stocks and you hopefully get the idea.
2 other things worth mentioning about short positions f**irst you have to pay an interest rate** **on your short positions** because you’re borrowing something.
Secondly, **short positions can be greater than 100% of stock.**
**Let’s get to GME**
GME is a brick and mortar video game company, after Covid hit Gamestop **unsurprisingly** has a couple of bad months and revenue falls. GME falls to about $4 per share.
Largely because of this many **big international investors essentially thought Gamestop was going to go bust and therefore shorted GME.**
Hoping to see it collapse, they didn’t see that there was some good news coming Gamestop’s way.
Firstly in **Mid August our saviour Ryan Cohen started buying GME shares.** By December Cohens company had bought about 9 million share (13% GME).
Then in January Cohen and some other CEOs were appointed to Gamestop’s board.
This gave Gamestop a huge advantage as **now they’ve got a billionaire investor who’s experienced with running ecommerce companies** which is exactly the business model Gamestop needs to shift to.
Secondly in **November PS5 and Xbox series X was released starting a new console cycle** which is good news for Gamestop.
Thirdly Gamestop **signed a deal with Microsoft which gave them a share of all of Xbox’s digital revenues**
So, what happened to the stock?
Firstly, the institutions that were shorting GME bought more short positions to try to supress the stock price.
This chart shows that for example on January 11th **there are massive 4 million short positions** taken despite the fact that this was the day Cohens board appointments were announced.
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In total 71 million short positions were taken even though Gamestop only had a float of 69.75 million shares. Remember you can have more short positions that actual shares.
This gets crazier because about 20% of Gamestop shares is held by insiders like Cohen. Insiders can’t sell easily because of regulations.
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There is the same amount again owned by big institutions who don’t normally trade either.
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**So that leaves between 20 to 30 million actively traded stocks and 71 million short positions who all need to buy stock**
That is a lot of demand and not much supply. Wallstreet Bets realized this and determined that if they bought the stock and **held** they could force the price up which triggers a **short squeeze.**
Where people with short positions desperately buy into a stock and try to cover before the price gets too high. These people are losing money but covering now prevents them from bigger losses.
**However because there isn’t enough stocks to go around the price of each stock jumps spectacularly**.
Remember it costs money to shorter position forever because of interest **so they want to act fast** which is exactly what happened to Volkswagen in 2008. Where it breifly became the most expensive stock in history. **Which is exactly what is happening with GME right now!**
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Ulitmatly Redditors made big money and **if you hold for longer you will make more.**
The 2 big short sellers who lost big money is **Melvin Capital and Citeron Resarch.**
**You can tell that they are panicking because 2 days ago Melvin Capital had to be bailed out by 2 big insitutions which isnt good for them.**
**There is a lot of short postions to be covered if you hold for longer the price for each stock will increase.**
Secondly if you’ve seen anything about this in the news it’s often spun as mental reddit investors ruin the market **there’s three things worth saying here**:
Firstly, wall street bets doesn’t actually **hold much sway over the market itself as WSB is an internet forum not an institution**.
Secondly, it’s not as if the market was rational **beforehand it’s just that only hedge funds used to be able to manipulate** it and this wasn’t even clear manipulation obviously some of GME’s rise is a function of speculation but there’s a good argument that it was undervalued and over shorted to begin with.
Thirdly it’s fundamentally a good thing that people are able to get into the stock market and make **money off GME as it might make things more volatile and harder for hedge funds.**
But fuck Wall Street.
tl;dr: Melvin Capital and other big short shellers were caught with their dick in the cookie jar when they overshorted GME making GME shares go to the fucking moon. If you hold GME you could be able to go to fucking Alpha Centuri and bankrupt big short shellers
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