The Gamestop fiasco, where hedge funds have been stung by a social-media-led squeeze has made the headlines. It is significant that the reaction of the regulators is stop trading rather than regulating shorting.

Apart from the sheer immorality of short selling, there are a few things I simply don't understand:-

a) The shares being shorted are "borrowed" from a broker, who doesn't own them. How is this even possible?

b) When the borrowed shares are sold to another person - who actually owns the shares at that point?

c) The whole scam relies on the person who bought the shares at the original higher price selling them back at a lower price. Why on earth would he do this?

I was wondering about point C as well. Briefly, listening to radio 4 this morning, I thought I understood. Then I realised I didn't....

Shorting is your choice. It goes wrong a lot.

Hedge funds apparently lost $40bn last year trying to short Tesla. No doubt they had been drinking the ?Big Short? Kool Aid. Now I would be the first to say that there is no way Tesla is worth nearly a trillion, but the market got flooded with people gagging to unload their cash, and there you go. Logic plays no part.

The most import bit of the Big Short is where the guy barricades himself in his office to stop people forcing him to unload his position. Historically, the other handy office feature for shorters and leveragers is the open window, high off the ground. The next most important bit is counterparty risk. If the other guy goes under, your stuff is worthless. Has someone actually allowed all these teenyboppers to do this on credit? Gosh.

I prefer to invest in small start-ups. People that actually need your money to make something and employ people. It?s not less risky. Possibly unsurprisingly, the micro biotech companies have been doing better than normal.

I am enjoying the popcorn element immensely. No doubt sometime this will be turned into a significantly less good, less interesting, and unnecessarily romantic hollywood film at some point.

Which is kind of unnecessary, because Bloomberg is running Hollywood worthy stories every day right now!

I don't see how it can 'end' well, particularly, but equally, I'm not rushing to Short GME right now...

What a world! What a story. Incredible.

A) the shares don't belong to an individual, but are managed by the broker. Other people invest the money, but don't decide what to invest in. Presumably the broker charges a fee for allowing the shares to be used.

C) it doesn't rely on the same person selling the shares, but somebody else off-loading theirs before they drop lower again. It only works with big companies that always have shares available, no matter the price.

My favourite part of it is the guys on Reddit in their mums basement thinking they?ve won at life here and them and all their other basement friends are in it together to take down investors. In reality, the guys tipping off to buy game stop stock on r/wallstreetbets and encouraging everyone to hold, are experienced traders posing as a basement dweller to suck in as many uneducated people into this as possible so when the time comes their massive portfolio can be sold before prices plummet and your average idiot is left.

Ok I take it back my favourite bit of it is the super rich making a living on gambling and manipulating people?s livelihoods going broke.


Worth bearing in mind that when someone ?borrows? stock in order to short it, there is interest to pay, in the same way if you borrowed money from a lender. This is why there is a big drive on Reddit for everyone who has bought in to hold as long as possible, the longer the prices stay high the less chance the hedge funds have of holding out for the prices dropping again and breaking even.

mikem said:

A) the shares don't belong to an individual, but are managed by the broker. Other people invest the money, but don't decide what to invest in. Presumably the broker charges a fee for allowing the shares to be used.

C) it doesn't rely on the same person selling the shares, but somebody else off-loading theirs before they drop lower again. It only works with big companies that always have shares available, no matter the price.

Click to expand...

I'm obviously not the only one struggling with the "logic" of this.

The fund manager gets back some of their loss from the shares devaluing, by charging interest on something they have no intention of selling, & the shorter hopes to buy the shares back at a lower price than they sold them for - also making a profit (but taking all of the risk as they have to give the shares back even if they end up costing more). The fund manager doesn't lose out either way.