Shorting a stock

This week you may have seen news reports regarding what is going on with GameStop publicly traded stock. There are two main positions (strategy) when one buys a stock. Long position or short position. A long position means that you simply believe in the company and its future and you want to own some stock in it. Pretty simple and straight forward. I have a friend that only has stock in Coca Cola because he was a pilot for Coke for many years. He likes the company and believes in it.

Shorting a stock is a whole different matter. Basically, it is a bet that a stock will go down instead of up. When people think of a betting, they think of Vegas. In Vegas when you bet money, the risk is you lose the money. When you short a stock, it is not at all like a Vegas bet as many wall street hedge funds are finding out over the past week.

When you short a stock (think it is going down) and it goes up instead, you not only lose the money you invested, but now you have to buy the same stock at the elevated price to cover your short position. Not so simply is it?

Talk about something that ought to be illegal (but it’s not) is when some (not all) large investment funds short a stock, they then begin a “bad mouth” campaign against the company to drive its price down so they can be proven correct and make money on the short position. They ought to be in jail.

In August 2020, GameStop was at $4. At the end of the year it was at $19. Today it at $345.  So, when the stock was at $4, if a buyer bought a short position (bets the stock goes down) to say. $2 and its now $345, they have to invest money to cover the upside. In this example, the price today is 172x what the short buyer said the stock would fall to and if the buyer bought one million shares at $2 (short position) He now must cover (loses) 172 million dollars (his position.) See how this works?

There is a lot happening with this stock and others like it where investors are ganging up together etc. but that is very complicated to explain. The point is, unlike Vegas, shorting a stock is an extremely risky thing to do. At least in Vegas when you lose, you only lose the amount you bet. Not so when shorting a stock. In the past week, many investment groups (mostly hedge funds) have lost billions because of their short positions. So, if you own stock and buy stock, get with a real professional who can help guide you to sound investing in various companies, not gambling on short positions. If you gamble on the short position, you could literally lose (pun intended) your shorts. KT

Leave a Reply

Your email address will not be published. Required fields are marked *