You may have heard the news about stocks for certain companies suddenly ballooning, quickly going from lunch money prices to several hundred dollars a share. In one case, the shares rose over 1700% since December 2020.1
So, what gives?
Financial institutions make assumptions (really, bets) that certain downward-trending stocks will continue to move lower. They borrow shares, sell them, and if the price continues falling as anticipated, they then buy the shares back at the lower price. This is called “short-selling.”1 If the stock runs up, there is no limit to a short-seller’s potential loss.
Some believe the “hockey stick” spike we’re seeing this past week originated on Internet discussion boards, where traders coordinated their efforts to disrupt the short-selling process. Generally speaking, these traders make such moves for a variety of reasons. Some may be protesting against Wall Street Hedge Funds known for selling short. Others may simply be attempting to take economic advantage of the situation and make a “quick buck.”1
While this makes for an interesting story, the truth is that this is more of a sideshow than the investment strategies investors use to further their goals for growth and future security.
This is high-risk speculative trading, not investment. As seen here, speculators are bound to get burned.
My advice? Enjoy the show, but remember: you’re playing for the long haul. We believe there is much more to be gained by avoiding losses than by chasing after supposed ‘winners’.
- NYTimes.com, January 27, 2021