How the Internet Gamed Wall Street’s Short Sellers

Why Some Stocks Have Surged

You may have heard the news about stocks for certain companies suddenly ballooning, quickly going from lunch money prices to several hundred dollars a share. In one case, the shares rose over 1700% since December 2020.¹

So, what gives?

Understanding Short-Selling

Financial institutions make assumptions that certain downward-trending stocks will continue to move lower. They borrow shares, sell them, and if the price continues falling as anticipated, they then buy the shares back at the lower price. This is called “short-selling.”¹

For more on market mechanisms, see What is Volatility in Stocks? How Markets Move.

The Role of Internet Traders

Some believe the “hockey stick” spike we’re seeing this week originated on Internet discussion boards, where traders are coordinating their efforts to disrupt the short-selling process. Generally speaking, these traders make these moves for a variety of reasons. Some may be protesting against Wall Street. Others may simply be attempting to take economic advantage of the situation and make a “quick buck.”¹

Focus on Long-Term Investing

While these dramatic moves grab headlines, they represent a sideshow compared to the investment strategies most people use for retirement planning. Enjoy the story, but remember: investing is a long-term game. Learn more about Financial Advice for Retirement Planning for Florida Retirees to see how long-term strategies can help protect your wealth.

Frequently Asked Questions:

1. What is short selling?

Short selling is a trading strategy where investors borrow shares of a stock they expect to decline, sell them at the current price, and then buy them back later at a lower price to make a profit. It’s a common tactic used by hedge funds and other financial institutions.

2. What is a short squeeze?

A short squeeze occurs when a heavily shorted stock rapidly increases in price. Traders who bet against the stock are forced to buy shares to cover their positions, pushing the stock price even higher.

3. How did Internet traders influence stock prices recently?

Online communities and discussion boards have coordinated trades to buy certain stocks, triggering rapid price spikes. This activity can disrupt short-selling strategies and create dramatic movements in stock prices.

4. Why did stocks like GameStop surge so much?

Stocks surged because retail investors collectively bought shares, creating a short squeeze. The combination of social media coordination, limited supply of shares, and high short interest contributed to these extreme price movements.

5. Are short squeezes risky for investors?

Yes. Short squeezes are highly volatile. Prices can spike quickly and drop just as fast, leading to potential large gains or severe losses. Investors should carefully assess their risk tolerance before participating.

6. Do short squeezes affect long-term investing strategies?

Short squeezes are generally short-term phenomena. Long-term investors focusing on fundamentals, dividends, and company growth may not be significantly impacted, though they should remain aware of market volatility.

7. What is margin trading, and how does it relate to short selling?

Margin trading allows investors to borrow funds from their broker to trade stocks. Short selling requires a margin account because investors are essentially borrowing shares. Margin trading carries higher risk, including the potential for unlimited losses.

8. Can retail investors really beat Wall Street?

While retail investors can impact stock prices temporarily, long-term market success typically relies on sound investment strategies, diversification, and understanding company fundamentals rather than short-term market trends.

9. Should I try to profit from a short squeeze?

Short squeezes are highly speculative and unpredictable. They can lead to rapid gains but also steep losses. Most financial advisors recommend caution and focusing on long-term investment goals.

10. How can I protect myself from volatile stock events like short squeezes?

• Diversify your portfolio

• Avoid trading based solely on hype or social media trends

• Understand the risks of margin accounts

• Stick to long-term investment plans aligned with your financial goals

My suggestion? Enjoy the show, but remember: you’re playing for the long haul.

Investment Risks to Consider

Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.

In order to sell short, you are required to open a margin account. Selling a security short involves greater risk, including the risk of unlimited losses in a position. Selling short is not suitable for all investors. Margin trading entails greater risk, including, but not limited to, risk of loss and incurrence of margin interest debt. Please assess your financial circumstances and risk tolerance before trading on margin.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.