I have very little Wall Street knowledge and I haven't seen an article explaining the whole GameStop issue in plain language. Can anyone break it down for the stock market illiterate? Or share a good link? My main question is...can this hedge fund bitch slapping be duplicated over and over again?
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So when trading stocks, you can make a bet a stock is going to go down in value. This bet is performed by getting people to lend you their stocks. Say you borrow 1,000 stocks. You promise them to give them back their stock at an agreed upon date plus a little money, so they get something out of the deal too.
You take their stocks and immediately sell them, which should immediately make the price drop, inciting others to sell their stocks. You expect the stock to drop in value, because of this (and other reasons) so you expect to be able to buy the 1,000 stocks at a lower price.
You buy the 1,000 stocks at the reduced price from the money you got from selling them, add a little money per stock and give them back to the people you got them from. If done well, you end up with some money left.
Now, this only works if the stocks actually decrease in value, otherwise you have to pay MORE for each stock to give them back.
Online you can look up information about stocks and the GME stocks were shorted by 140%. So people noticed this and started buying as many stocks as they could, so that everyone shorting these stocks would be in big trouble. They would have to pay back many times the expected value of the stocks and make huge losses to uphold their contracts.
The risk is of course that a lot of people start selling their stocks once their value increases. This would normally be a way out for the people shorting on stocks. However, in this case this did not happen, because people were holding on to their stocks. And they still are.