Shorting a stock is already a risky proposition, add in a band of amateur investors intent on sticking it to the big-time investors, and the losses piled up fast.
GameStop has been through some volatile weeks. The Grapevine video game company’s stock market saga has been like a wild video game. In an era of online commerce, the brick and mortar video game store was struggling.
Sales had been declining, along with its stock price — which a lot of big-time investors believed would keep falling. They short sold it — meaning basically they “borrowed” someone else’s shares, then immediately selling them at the current price. Then they would wait for the stock to fall so they could buy those shares back at a lower price, return them to their original owner, and pocket a huge profit they made by buying high and selling low.
Normally, that’s a big enough gamble. But what they didn’t count on in this case was a bunch of amateur investors fond of GameStop who united on Reddit and agreed to start buying up lots of shares, which makes the price go up instead of down.
That is the danger with shorting a stock. Usually, when you buy a stock the more it goes up the more you gain. The most you can lose is just the original money you had put in.
If you short a stock your gain can be huge. But the most you can lose is limitless because eventually you still must buy back the shares you had borrowed and sold so you can return the same number of shares to their original owner. If shares zoom past the price at which a short seller cashed them in, the seller loses more and more money the higher the stock rises—and there isn’t a limit on how high it can go.
Consider that in the case of GameStop, shares went from $20 to $396 in about 2 weeks. It remains to be seen if this leads to new stock market regulations. Even if reforms come, it’ll be too late for many investors who had bet big that GameStop would fall and experienced a rough “Game Over.”