You might have heard Gamestop, the ubiquitous video game store, had a good week for its stock price: really Good week.
The price is up nearly 700% over a few days, making billions for a few days, and costing the hedge fund Melvin Capital a massive loss of billions as well. Not because of any earnings report, merger, or other event that would affect the share price, but because of some Reddit users I decided to buy en masse The company’s share price in a move called short squeeze.
Define short sell and short squeeze
to me Short saleFirst, you borrow the shares from a broker with a promise to return them on a specified date. You can then sell these borrowed shares instantly at the current market price. If the share price falls by the time you agree to return the shares, you buy the shares at the new low price and you get the difference. If the price goes up, you are losing money – you likely lose a lot. Since there is no upward limit on the stock price, in theory the short seller could suffer infinite losses.
a Short pressureOn the other hand, it occurs when investors intentionally inflate the share price in response to an ongoing short sale. This causes the seller to close short early to avoid further losses, driving the stock price higher.
If you thought these charts are more like a poker than an investment, you are not wrong. Both are risky, but they can lead to noticeable gains and losses, as Gamestop stocks showed this week.
Despite the hype surrounding Gamestop and AMC Theaters, another company going through intense short trades, this isn’t the first time this has happened. Similar buying bouts occurred in the 2000s with the dot-com bubble, and in 2018, Canada’s Tellray suffered similar artificially inflating its share price.
Short selling and short selling are not illegal. However, the Securities and Exchange Commission, state securities regulators, are monitoring these events closely. Here’s why.
False or misleading information
There are now a number of retail brokers targeting chairs investors. Robinhood is a popular app that anyone can download, for example. On Reddit, there are channels dedicated to investments. In the past week, thousands of messages have promoted Gamestop, urging people to buy and hold their shares.
Again, none of the above is necessarily illegal. However, the Securities and Exchange Commission will likely investigate whether any of the investors who have been holding the stock for the long term or who have been trying to squeeze stocks for a short period are manipulating the investors.
Market manipulation occurs when there is intentional or intentional behavior designed to deceive or defraud investors by controlling or artificially influencing the price of securities. For example, Section 17 (b) of Securities Law “Promoting” or paying to promote shares without disclosing that you are being paid for doing so is prohibited. It also generally prohibits deception, misrepresentation, and other fraudulent sale of securities. One popular example is known as a ‘pump and dump scheme’, where you get to buy from a large number of investors to temporarily inflate the stock price and sell while it is up for a while.
What you need to know
What does this mean? An armored investor Read something on Reddit After the Gamestop on Robinhood shares were purchased, it is unlikely to face any legal trouble. However, if you intentionally interfere with the market price by posting false or misleading claims on Reddit, you may be investigated.
For now, Robinhood has discontinued, then resumed allowing its users to purchase Gamestop shares in limited quantities, along with other shady stocks such as AMC. Likewise, the New York Stock Exchange is looking for Gamestop to suspend for 30 days.
As a result of this week’s events, regulators and lawmakers may be looking at ways to curb the kind of buying frenzy caused by social media. While it might be a good idea for armchair investors to capture short-term gains while a hedge fund loses billions, it can reduce market integrity and put individual investors at risk. With retail and social media, the chances of something similar happening again are relatively good. Good enough, at least, that some people will bet on him again.