The GameStop Saga Isn’t About Finance, It’s Part Of The Ongoing War Between Elites And PopulistsThe rules here are simple: Heads Wall Street wins, tails you lose.The Federalist, Jan 29, 2021, Sean Davis
<Snip>
Think about it this way: If you buy a stock for $25, the most you could possibly lose if the entire investment went belly up and the price fell to $0 is $25, the price you paid for the stock. On the flip side, your gains are potentially unlimited, because who knows how high the stock price could go.
Shorted stocks are the exact opposite. If you short a stock at $50 — you borrow the stock, and immediately sell it at the current price of $50 — the most you’ll earn is $50. When the stock approaches $0, you’ll buy it for pennies, return the share back to the investor from whom you borrowed it, and the difference is your profit.
However, if the stock price goes up, so do your losses. If it goes to $100, you have to buy it at $100 in order to return it to its rightful owner. But what if it goes to $1,000, or $10,000? Your losses could be infinite. The same goes for the various baskets of options and stock derivatives that can be used to mimic the payouts of stock shorts.
This brings us back to GameStop. A major hedge fund had a massive, and very public, short position on GameStop. Enter Reddit. A bunch of Redditors who followed the stock market realized that this billion-dollar hedge fund had a problem on its hand: Due to a combination of factors, GameStop somehow ended up with more short positions than outstanding shares.
The Redditors realized they could pull off what’s known as a “short squeezeâ€: If they started buying up GameStop stock and refusing to sell it, they could crush the hedge fund as its short positions came due, potentially even driving it into bankruptcy, all while profiting in the market by purchasing a stock that was once in the single digits and watching it approach $50 and then $100 and $200 and even $300.
At one point, it was estimated that the losses accumulated by GameStop short-sellers approached $5 billion. Melvin Capital, the now-notorious hedge fund with the huge GameStop short position, eventually required an infusion of $2.75 billion in cash from an even larger hedge fund to cover its possession and remain solvent.
And that’s when the Wall Street empire struck back. Suddenly, the federal Securities and Exchange Commission, or SEC, which purports to be a Wall Street regulator but instead operates as little more than a Wall and Broad soothsayer to a public skeptical of Wall Street’s power, weighed in and intimated that it might investigate or even shut down the trading of GameStop stock to prevent the price from getting even higher.
Then the Wall Street-backed trading apps and the Wall Street brokerages joined in, announcing they would no longer allow their users and retail investors to buy GameStop stock. The result? When you can no longer buy a stock, its price can only go in one direction: down.
More:
https://thefederalist.com/2021/01/29/the-gamestop-saga-isnt-about-finance-its-part-of-the-ongoing-war-between-elites-and-populists/