What is shorting a stock? Why was everybody going crazy? What was the war going on between Wall Street and retail investors? Today, we’re going to break down what exactly happened with GameStop stock.
Imagine you’re at a sushi restaurant and they serve miso soup. You have an insider tip that this weekend, they’re going to have a huge sale on miso soup. Maybe there’s some news coming out that people are going to want miso soup less, so the restaurant has to discount it to sell their existing stock.
Let’s say you ask the restaurant if you can buy 10 servings and pay the restaurant market price when Saturday comes. The restaurant agrees, you borrow the soup, then you go out and sell it for $5 per cup of soup. By the time Saturday comes, miso soup has been discounted to $2 per cup. You’ve sold the cups of soup for $5 each, and now you pay the restaurant $2 per cup. You made $3 per cup of miso soup.
That’s what shorting stock is. The problem occurs when you think the price is going to go down, but it goes up. If the price of miso soup on Saturday is $10, now you’re going to lose $5 per cup. This is what happened to hedge funds – they thought the price of GameStop would go down, but it went way up.
There’s an upside if the price goes down, but there’s unlimited downside if the price goes up. The price got pumped up by Redditors, but when your relative is telling you they want to invest for the first time and in GameStop, that’s when you know the stock is about to come crashing down.
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