This is an exciting time to be an investor in the stock market.
As you know by now, Reddit investors just launched an "attack on Wall Street" by purchasing shares in GameStop. This pushed the stock price up over 480% in a week.
The investor who helped direct the world’s attention to GameStop is 34-year-old Keith Gill. Gill used Reddit’s WallStreetBets message board to promote GameStop, and used the identity of Roaring Kitty on his YouTube channel and Twitter page to help engineer a short squeeze against the hedge funds that were betting the price of GameStop would drop. But what is a short squeeze?
If investors think a stock's price is dropping, they can short the stock. They borrow shares and sell them with hopes of buying them back at lower prices. However, stocks can theoretically keep rising, which could cause losses. So the investors that short the stock will either have to put more money up to secure their position or close their positions.
If they choose to close their position, they are buying the stock to exit their position. This can drive the price higher and force other short sellers to do the same.
This creates a continuous cycle of buying and pushing the price up even higher. This is the short squeeze, as those short the market essentially get "squeezed out.” And it's exactly what happened with GameStop.
Hedge funds and other short-sellers have lost an astounding amount betting against GameStop, and there has been a regulatory response to this event. Robinhood limited the number of shares each user can purchase, stating that the trading restrictions were risk management decisions to protect Robinhood and its clearinghouses.
In today’s podcast, Phil and Danielle discuss the GameStop situation and explain why the market should be free—where regulators stay out of the “little” guy’s way.
Learn more about the basics of investing in the stock market with my Beginners Guide to Investing in 2021. Click here to download: http://bit.ly/39EOFR0
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