This week, Chief Income Strategist Marc Lichtenfeld and Contributing Analyst Jody Chudley covered the heavily shorted stocks, like GameStop (NYSE: GME), that a band of traders on the chat site Reddit sent soaring higher despite their weak fundamentals.
In some cases, this cost the hedge funds billions…
Melvin Capital, for example, lost 53% in January alone.
As Marc explains in this week’s episode of his hit YouTube series State of the Market, the traders accomplished this by forcing the hedge funds into a “short squeeze.”
Investors (or hedge funds) who want to bet against a stock can “sell shorts,” or borrow shares of the stock to sell and replace with shares bought later.
The investors or hedge funds selling the shorts make money when the stock goes down because they are able to buy their replacement shares at a lower price.
But things did not go according to plan for these hedge funds…
When the Reddit traders bought up shares and inflated GameStop’s share price, the hedge funds that had sold the stock short still had to buy replacement shares to close out their trades.
That pushed the stock price even higher, continuing the cycle.
On Thursday the stock closed just above $53. Some of the Reddit traders are still holding despite the gut-wrenching dive down.
But the Redditors and the Wall Street giants aren’t the only ones who could see a change to their portfolios as a result of last week’s events…
In fact, you could be affected whether you chose to participate in the gambit or not.
CNBC estimates that nearly 15 million workers and 11 million retirees could help eat the cost, as pension plans allocate varying amounts of their holdings to hedge funds.
Many of the Redditors would argue that Wall Street made its own bed. After all, short selling is infamous for its high risk and limited upside.
Yet short sellers, as Marc reveals in this week’s State of the Market, don’t take on this risk for no reason.
In fact, they’re often onto something.
In this week’s episode, Marc pulls back the curtain on why hedge funds would bet against businesses like GameStop.
He also explains exactly how the Redditors took advantage of the mechanics of shorting a stock in order to cause billions of dollars’ worth of damage…
And what you can learn from their movement.