Thread 1: If you've been following Wall Street these past couple of days you've likely heard several stories about the GameStop (GME) short squeeze that's actively taking place.
You've probably, unless decently well versed in finance, not fully understood what is happening, nor why this is such a cataclysmic event in the history of finance.
I'll spend a little time to try and explain why this is the greatest Robin Hood story of the modern era and a win for the little guy on Wall Street.
The way the stock market functions is no different than any market, there are buyers and sellers.
In the stock market buyers represent the bid side of the equation and sellers the ask. They both get to set their prices and through the mechanism of exchange a price equilibrium comes about the given price for a stock.
Now GME had something unique happen, it's been a bit of a dying company over the past decade, so its price has been lagging below 10 bucks for quite some time. Additionally, the company never issued many shares, so the activity in the stock has never been super crazy.
As of today they have about 47 million shares available for the public market to hold and invest in. ***Remember this number, it will become key later on.
Now in the stock market we also have this unique mechanism called short selling.
Short selling is actually quite simple, I as an investor can borrow shares from someone currently holding them (long term investor) and sell them in the market today, with the agreement that I will buy back their shares at a later date, either when I want to or when I'm forced to
. The interest of being short a stock is normally reserved to high net worth folks and primarily hedge funds due to the credit requirements and the amount of cash required to maintain a short position.
The reasons to be short are many, but primarily revolve around dying business models or overvalued companies. In taking a short position I am exposing myself to infinite downside risk (the stock could go up forever and eventually I'll have to buy it back for you at that price),
while having a finite level of return.... stocks can't trade below zero so the max return I can make is 100% at virtually 0 a share.
The key point, besides what shorting is, is to understand that when you short a stock you are required to hold a cash position (normally 50%, but actually 75-100% for GME today) that can cover your purchase of the shares should you need to close out your short position
(think of it as a cash reserve required for the line of credit that the firm just granted you).
Ok, now that everyone knows what short positions are we can get to the fun stuff.
$GME as a stock, due to how hedge funds felt about the companies future, has been one of the most heavily shorted stocks on the street for quite some time. Recently, however, something strange happened.
Funds started shorting the companies stock to the tune of 136% of the amount of shares out there (remember if there's liquidity in a stock, I can short, so having more of a short percentage out than the total shares outstanding can happen it's not the same as a naked short).
*****So, all you need to remember from this paragraph is that funds thought $GME was going bankrupt, so they shorted the stock so they can make a tidy profit while doing so.
Enter a sub-reddit called r/WallstreetBets @wallstreetbets.
The folks over there came up with an actually brilliant idea (and I don't say this lightly... it's an idea that's so crazy, and so brilliant, it will re-write trading theory).
Once they saw the short interest in $GME at 136%, and the price of the stock (about $4), and the low liquidity of the stock (47million shares available), they determined that if enough people bought the stock at around the same time,
they could push the price higher and force short sellers to purchase their shares back to close out their positions (thus pushing the price higher) or post additional margin to keep their short interest .... now in the first few months this didn't work out as well as planned.
The shares would rally, but they never posed a serious risk to the funds. It's only a 180 million dollar company after all, so they could pretty much buy the company to cover their losses.
Another factor to consider here is ego, fund managers don't like to be pushed around, and to hell with r/WallStreetbets... their words not mine.
Fast forward to the past ten days.
As $GME moved higher, these funds simply kept putting up margin (short interest is still 136%) thinking the momentum would stop and the stock would plummet. Meanwhile over on r/WallStreetBets people kept talking about holding the stock, not selling and buying more.
This is perfectly legal because it's a public forum, and people are allowed to discuss stocks with whoever they so choose. This coordinated buying of 10's or 100's of shares across millions of accounts kept driving the price up day after day.
Momentum was smaller at first, 10%-30% here and there, but the march upward kept triggering margin calls and short covering or mostly more margin deposits.
Day after day, hour after hour, funds kept doubling down on the fact that they were not going to be pushed out of their positions by a bunch of kids in their moms basements.... boy oh boy how wrong they were.
Let's jump to last night.
Following yesterdays scare ($GME was at 160 for a second) many funds decided they needed more cash just in case things got a little crazy and they needed to cover a margin call at $100+.
Find thread 2 on my profile, sorry Twitter limits threads.
https://twitter.com/nobeerleftcast/status/1354271638670467073
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