The most important thing is that there were so many shorts that there weren't even enough stocks being traded to cover them. It was such a sure thing that the price would go down, nobody was paying attention.
All those institutions aren't just desperate to cut their losses, they actually HAVE to come up with stocks and there aren't enough for sale. That's why this is still working even with people selling to secure profits.
Same crap that sent oil to negative value for a day or so at the start of the pandemic. All those day traders trying to not actually have to take delivery of oil!
Inline Edit 3: I think deep down we all know GameStop will decline eventually, but more new people are shorting the stock and it seems like that is just going to prolong things. The bubble pops as soon as the shorts come due (Inline Edit 2a: Margin Call) and you can't make money on the fall because everyone assumes it is coming. It may even prolong the rise if people short it too much! Inline Edit 2b: The number of shorts went up? People are crazy!
EDIT 1:
Shorting is selling stock you borrowed from someone else and then buying it back to return it. You make money by buying it back for less than you sold it for. While you borrow the stock, you pay interest. You also have to keep a margin account with money in it because people don't just hand out their stocks for other people to sell.
These people shorted the stock when it was $10 and the most they could possibly make is $10/share if GameStop went bankrupt and their share price went to $0. They didn't have to pay much interest and they didn't need a lot in their margin accounts. Now the stock is at $340 or something and they have to pay a lot more in interest to keep borrowing it. They also have underfunded margin accounts and this is where a Margin Call (a demand to fund your margin account) is going to really ruin people. Typically a margin account starts with 150% of the price of the stock ($15, $10 of which came from the original short sale) and they have to keep around 125% of the price of the stock in there ($425, $10 of which came from the original short sale and $415 comes from no where because you don't have that kind of scratch right now).
The short sellers must buy stock to get out of the position. As someone commented before, there are tricky ways to do this without running out of stock, but they still have to pay the new high price and us regular folk don't get that kind of special virtual stock way out. In the event of a margin call, you must either fund the margin account or the broker will liquidate your other positions to zero your account. This is where the short sellers have no choice and their shorts come "Due". There is no actual due date and the broker would be happy for you to just pay them interest out the nose well in excess of the theoretical $10 you could have made, but they also want their $340 stock back and if you can't fund your margin account they will dump you and sell your stuff.
Yes, through rich people magic, the actual existence of the stock you borrowed and sold may be iffy. You're still going to have to buy a stock back and return it and pay interest on the stock you borrowed, even if more stocks got borrowed than actually existed. Brokers are not losing money, they're creating it out of the void. I don't know how this works.
That the short sellers have sold 140% of the shares available. They did this to themselves.
Update: I’m getting this question a lot. See my comment here for an explanation for how they were able to sell 140% of the share float. (Also, this isn’t just one short seller. There are a lot of people/hedge funds who have shorted GME)
![image showing What's going on with GameStop in 4 charts [OC]](df4c7484-9671-5b20-9b57-7cccadc2450a.jpg)
saintcrazy on January 27th, 2021 at 18:00 UTC »
As someone who doesn't understand finance, can anyone tell me how this affects Gamestop materially? Will there be any other ripple effects from this?
CapinWinky on January 27th, 2021 at 18:14 UTC »
The most important thing is that there were so many shorts that there weren't even enough stocks being traded to cover them. It was such a sure thing that the price would go down, nobody was paying attention.
All those institutions aren't just desperate to cut their losses, they actually HAVE to come up with stocks and there aren't enough for sale. That's why this is still working even with people selling to secure profits.
Same crap that sent oil to negative value for a day or so at the start of the pandemic. All those day traders trying to not actually have to take delivery of oil!
Inline Edit 3: I think deep down we all know GameStop will decline eventually, but more new people are shorting the stock and it seems like that is just going to prolong things. The bubble pops as soon as the shorts come due (Inline Edit 2a: Margin Call) and you can't make money on the fall because everyone assumes it is coming. It may even prolong the rise if people short it too much! Inline Edit 2b: The number of shorts went up? People are crazy!
EDIT 1:
Shorting is selling stock you borrowed from someone else and then buying it back to return it. You make money by buying it back for less than you sold it for. While you borrow the stock, you pay interest. You also have to keep a margin account with money in it because people don't just hand out their stocks for other people to sell.
These people shorted the stock when it was $10 and the most they could possibly make is $10/share if GameStop went bankrupt and their share price went to $0. They didn't have to pay much interest and they didn't need a lot in their margin accounts. Now the stock is at $340 or something and they have to pay a lot more in interest to keep borrowing it. They also have underfunded margin accounts and this is where a Margin Call (a demand to fund your margin account) is going to really ruin people. Typically a margin account starts with 150% of the price of the stock ($15, $10 of which came from the original short sale) and they have to keep around 125% of the price of the stock in there ($425, $10 of which came from the original short sale and $415 comes from no where because you don't have that kind of scratch right now).
The short sellers must buy stock to get out of the position. As someone commented before, there are tricky ways to do this without running out of stock, but they still have to pay the new high price and us regular folk don't get that kind of special virtual stock way out. In the event of a margin call, you must either fund the margin account or the broker will liquidate your other positions to zero your account. This is where the short sellers have no choice and their shorts come "Due". There is no actual due date and the broker would be happy for you to just pay them interest out the nose well in excess of the theoretical $10 you could have made, but they also want their $340 stock back and if you can't fund your margin account they will dump you and sell your stuff.
Yes, through rich people magic, the actual existence of the stock you borrowed and sold may be iffy. You're still going to have to buy a stock back and return it and pay interest on the stock you borrowed, even if more stocks got borrowed than actually existed. Brokers are not losing money, they're creating it out of the void. I don't know how this works.
DrPhrawg on January 27th, 2021 at 20:05 UTC »
You’re missing the MOST IMPORTANT part of this.
That the short sellers have sold 140% of the shares available. They did this to themselves.
Update: I’m getting this question a lot. See my comment here for an explanation for how they were able to sell 140% of the share float. (Also, this isn’t just one short seller. There are a lot of people/hedge funds who have shorted GME)
https://www.reddit.com/r/dataisbeautiful/comments/l6931s/whats_going_on_with_gamestop_in_4_charts_oc/gkzyiph/?utm_source=share&utm_medium=ios_app&utm_name=iossmf&context=3