You may have heard the news about stocks for certain companies suddenly ballooning, quickly going from lunch money prices to several hundreds of dollars a share. In one case, the shares rose over 1700% since December 2020.1
So, what gives?
Financial institutions make assumptions 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 and pocket the difference. This is called “short-selling.”1
The “hockey stick” spike we’re seeing this week originated largely from stock investors on WallStreetBets, which is a Reddit forum where individual traders discuss stock investments. Recently on the forum, traders coordinated their efforts to disrupt the short-selling process by buying shares of companies in droves to artificially inflate prices. This caused traders who "shorted" those stocks, notably some large hedge funds, to lose billions of dollars. The traders who played a part in this "short-squeeze" had varying motives. Some may be protesting against Wall Street. Others may simply be attempting to take economic advantage of the situation and make a “quick buck.”1
While this all makes for an interesting story, the truth is that this is something of a sideshow and a far cry from the investment strategies most investors use to further their retirement goals.
My suggestion? Enjoy the show, but remember: you’re playing for the long haul.
1. NYTimes.com, January 27, 2021
Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
In order to sell short, you are required to open a margin account. Selling a security short involves greater risk, including the risk of unlimited losses in a position. Selling short is not suitable for all investors. Margin trading entails greater risk, including, but not limited to, risk of loss and incurrence of margin interest debt. Please assess your financial circumstances and risk tolerance before trading on margin.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.