Unlike the goal heard most often while investing which requires buying low and selling high, the strategy of “shorting” holds a different goal. Although extremely risky the main goal of shorting a stock is to borrow a stock when it is doing well and sell this borrowed stock so that when and if the company starts to dip you can repay the share that you bought at a lower amount. An important detail regarding this strategy is that the borrower must own a certain amount of stocks before they borrow, this is one of the many factors that also happens to make shorting extremely risky.
A real life example of this method being used in real life, is the gamestop situation that just occurred a few months ago. For those who are not familiar with this situation, Hedge Fund professionals on Wall Street started shorting gamestop(which meant they were relying on the downfall of the company). With full awareness of how gamestop has lost its value in the stock market, a group of people on reddit encouraged others to buy gamestop stock so that its price per share increases. With the vast and unthinkable number of people this meme reached, gamestop saw numbers that it never did before. Gamestop’s price per share, which closed at $39.36 on January 19th, skyrocketed in just the span of eight days. On January 27th, gamestop’s price per share skyrocketed to $347.51, which were numbers that the company had never seen before, and numbers that easily made investors millionaires over the course of a week.
Now to get into the specifics, this ruined the original plan that Wall Street Hedge Funders had, because of the price per share. With the goal of profiting off the vast numbers of shares they had borrowed, instead of the price per share going down after re-sold the stock it actually skyrocketed. This meant that if the Hedge Funders bought the shares on January 19th at a price of $39.36 and re-sold it with the plan to pay the broker back in a week, they would have had to pay around $300 more per share ultimately causing them great amounts of loss. Also considering that they would have borrowed thousands of shares to effectively utilize the shorting strategy, paying $300 extra on one thousand shares is roughly $300,000 in lost cash. This situation not only effectively portrays the major risk in shorting stocks, but also the power of the internet, as it was over a meme, in which hundreds of million dollars had been lost.
Another company that also was on the brink of bankruptcy before a situation like this occurred was AMC. With a similar situation occurring in January as well as this past weekend, AMC has found a way to maintain relevance in everyday news despite the lack of customers they receive on a day to day basis. To briefly go into the specifications, on Monday May 24th, the price per share of game stop closed at $13.68, which then rose quickly to $36.72 at its peak over the weekend. Although this increase in the price per share was not nearly as dramatic as that of Gamestops, it was enough to cause those who had attempted to short AMC once again, to lose 1.3 billion dollars.
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