Newsminute Economics: #3 Short Selling

Hi, it’s me again, Professor Tigger. Today on the show, what is short-selling, the wicked plan that would have driven the crazy GameStop’s stock down beyond imagination.

Short-selling is the reason why hedge funds sell shares of a company. The idea is that hedge funds “borrow” many shares of a company from a broker, whose shares come from their many clients. If each share has a current price of, let’s say, $100, then in theory, if they sell them in large quantities simultaneously, it will cause panic in the market, and the price will fall. Usually, the hedge funds could predict how much it would go down. And when the price is low, at maybe $50, the hedge funds would buy back at that price, so that for each share, they earned $50. They would then return them to the broker.

The hedge funds don’t care what happens to the company; They only want to earn money. But, in the case of GameStop, retail investors bought them up, so the price rose, and the hedge funds lost money. What I’m telling you is to think twice before investing, even if you have much experience.