What it is, why it is dangerous and how ‘pushing’ occurs

You may have heard by this that an army of retail investors have been using one of the most common hedge fund investment strategies against them.

That is, a short sale. It generally involves selling borrowed shares of stock with the belief that the price will fall, at which point you would buy shares at a lower price until you borrowed. repayable (further below). And it’s not an area of ​​just hedge funds or other big investment agencies. Individual investors – for better or worse – can also hire, if their bankruptcy agrees.

“For my clients who want to make short stocks, I tell them it’s not generally a good idea,” said financial planner Ivory Johnson, who founded Delancey Wealth Management in Washington.

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Retail investors, led by those in the WallStreetBets Reddit chat room, have been hoarding into Gamestop, AMC Entertainment and other stocks whose hedge funds were counting on going higher. low.

In short: The whole purchase raised prices, meaning the money bet was wrong and they have lost billions of dollars. A year to date, for GameStop retailers alone, the loss is at least $ 5 billion, according to S3 Research.

“Those investors have access to information, they know which companies are significantly shortened and they are communicating with each other,” Johnson said. “I wouldn’t be surprised if they keep doing it. … looks like Occupy Wall Street Part 2. “

While this group shows how investors can hit hedge fund sales where it hurts, the ongoing battle also shows how dangerous short selling is.

You usually buy stocks with the assumption that they will rise in price and that you will make a profit when you sell them.

With short selling, the ultimate goal remains a profit. But the issue is based on your opinion that the stock is overvalued, so it will fall in price.

The general process: You borrow shares from your broker and sell them at the normal market price (which, in turn, you think will fall). If you prefer, your opinion is correct, and when the price has fallen, you buy shares at that lowest cost to repay the ones you borrowed. Simplified picture: You shorten stock $ 7. It slips in price, and you buy it at $ 2. Your profit is $ 5.

However, if the price goes up, at some point you would still have to close the deal – that is, you would have to buy that stock to pay back the bankruptcy . So if that $ 7 stock starts to rise, and you sell it at $ 10 to cover your short position, you have lost $ 3.

“Most investors think of risk as just the downside,” said CFP Matt Canine, a senior wealth specialist with East Paces Group in Atlanta. “When you buy a stock outright, your losses are complete – if you buy at $ 100 and it goes to zero, you lose $ 100.

“But if you shorten it and it goes to $ 200, $ 300, $ 400 etcetera, your losses are worse,” Canine said. “The danger on the upside is endless.”

When stocks are severely shortened, and investors buy shares – which push the price up – short sellers start buying to lower and lower their position loss as price rises.

This can create a “short push”: Short sellers continue to buy the stock, pushing the price up even higher and higher. (This is what happened with the short stocks targeted by the Reddit investment crowd).

Generally, you can only engage in short selling using a margin account. This is basically a loan from your broker, which charges you interest and asks you to keep a certain amount of assets in that account.

When the value falls below that level, your bankruptcy will ask you to replenish the account. Your bankruptcy may also require you to cover your short position when the price goes up.

As for how the Reddit investor saga vs hedge money will end?

“Some people are going to make a lot of money,” said Johnson at Delancey Wealth Management. “But there will be people who … get in and lose the shirt.”