Investing megathread extravaganza

[DaFace]

A place to talk about investing stuff.

[eDave]

I bought into GME last night through RH but my orders were cancelled this morning.

[Fat Elvis]

Originally Posted by jjjayb

You're borrowing shares from someone with the promise to give them back at a set later date. You borrow them and sell them at the higher price hoping the value will drop so you can buy them back at a lower price and return them to the original owner.

In simplistic terms, say shares of xyz are going for $10 a share. You borrow 100 of them and sell them at $10 a share making $1,000. Then when the stock plummets to $1 a share you buy them back for $100 and return the shares to the original owner. You've netted $900. But what hedge funds are doing is on a much larger scale.

The biggest issue is when these large hedge funds short stocks they sometimes try to purposely drive the stock prices down to reap the rewards. They go on CNBC and other business channels and talk shit about a stock to get people to drop it like a hot potato. It's slimey.

The issue with Gamestop and what WSB was trying take advantage of was that the amount of stock shorted exceeded the actual amount of stock in circulation. Technically, that should never happen; theoretically, short positions can never exceed 100% of the outstanding shares because you are borrowing existing shares. Hedge funds, however, held a short position in Gamestop that represented 140% of the shares.

[Discuss Thrower]

Originally Posted by tatorhog

I get that much, but the whole "borrowing" part. I never really understood that part of it. How do you borrow a stock to sell? I'm assuming its just a mechanism built within TDAmeritrade or whatever brokerage you use.

It's allowed because the physical possessors of the stock being shorted will collect premiums at some point in the process.

[SithCeNtZ]

Originally Posted by tatorhog

I get that much, but the whole "borrowing" part. I never really understood that part of it. How do you borrow a stock to sell? I'm assuming its just a mechanism built within TDAmeritrade or whatever brokerage you use.

You aren't really "borrowing". You are entering a contract that gives you the option to execute a trade at a certain point for a certain price. Until that point happens, you don't "own" the stock at all, you just own the contract that says you can buy X amount of shares at a certain point. You can sell that contract and never buy a single share of actual stock.

[MagicHef]

Originally Posted by SithCeNtZ

You aren't really "borrowing". You are entering a contract that gives you the option to execute a trade at a certain point for a certain price. Until that point happens, you don't "own" the stock at all, you just own the contract that says you can buy X amount of shares at a certain point. You can sell that contract and never buy a single share of actual stock.

I think you're confusing shorting with options.

[Fat Elvis]

Originally Posted by tatorhog

I get that much, but the whole "borrowing" part. I never really understood that part of it. How do you borrow a stock to sell? I'm assuming its just a mechanism built within TDAmeritrade or whatever brokerage you use.

Think of it as a kind of "predictive (or speculative) arbitrage".

[Fat Elvis]

This price action today is absolutely fascinating...

[DaFace]

Originally Posted by Fat Elvis

This price action today is absolutely fascinating...

No doubt - there are going to be MBA case studies written about this.

[FD]

Originally Posted by MagicHef

This is beyond absurd. @FSCDems need to have a hearing on Robinhood's market manipulation. They're blocking the ability to trade to protect Wall St. hedge funds, stealing millions of dollars from their users to protect people who've used the stock market as a casino for decades. https://t.co/CGkJxVfzkv

— Rashida Tlaib (@RashidaTlaib) January 28, 2021

This is just completely insane. Robinhood is trying to stop its users from buying into an obvious crash and losing everything. Is it overly paternalistic? Yes. But it is definitely in the interests of the retail traders on the app.

[tatorhog]

Originally Posted by Fat Elvis

Think of it as a kind of "predictive (or speculative) arbitrage".

In that sense though, whoever actually owns the equity...do they have say in what happens with it? For the duration that the stock is shorted, can the actual owner do anything with it? Or are they forced to hold until the contract is expired? Are their time limits for when a short has to be executed in?

[ReynardMuldrake]

You guys, the price has not crashed yet. There is massive pressure pushing in both directions right now. As long as the outstanding shorts exceed 100% of float a squeeze remains likely. This is going to stay super volatile for the next week or so.

[Discuss Thrower]

No it's pretty clear from mainstream news coverage that this isn't Robinhood looking out for their users' interest. They're covering for the hedge funds who are getting BTFO by a bunch of barbarians instead of their Ivy-league educated, big moneyed competitors.

[ReynardMuldrake]

Originally Posted by Fat Elvis

The issue with Gamestop and what WSB was trying take advantage of was that the amount of stock shorted exceeded the actual amount of stock in circulation. Technically, that should never happen; theoretically, short positions can never exceed 100% of the outstanding shares because you are borrowing existing shares. Hedge funds, however, held a short position in Gamestop that represented 140% of the shares.

That's exactly what happened. Now WSB is trying to pinch the hedge funds for shorting shares they didn't have. The SEC should have had better safeguards in place to prevent shorts from ever getting more than 100%.

[MagicHef]

Originally Posted by FD

This is just completely insane. Robinhood is trying to stop its users from buying into an obvious crash and losing everything. Is it overly paternalistic? Yes. But it is definitely in the interests of the retail traders on the app.

You can't actually believe this.

[Shag]

Originally Posted by FD

This is just completely insane. Robinhood is trying to stop its users from buying into an obvious crash and losing everything. Is it overly paternalistic? Yes. But it is definitely in the interests of the retail traders on the app.

The **** it is. This whole thing basically bankrupted Melvin (hedge fund), and Citadel helped bail them out. The guy who founded Citadel owns a huge stake in Robinhood, so he made a call. This is protecting the hedge funds, and has nothing to do with protecting its users. I hope RH gets buried over this.