Is your GameStop stock price higher now than it was last week? Short selling is being brought to the fore of many financial markets in recent months, with businesses like GameStop Corp. witnessing their share price hike by over 2,500 percent in just a matter of weeks. What is short selling and why is it happening to GameStop? There are a few things you need to understand about short selling before learning how you can take advantage of this hot stock move.
Short selling is a type of stock market manipulation that occurs when a company sells shares of stock for less than they are worth. Companies can do this either with “bailouts” or “defeat” strategies, but the ultimate goal is to reduce their risk through derivatives and legal hedging. This is where companies utilize a type of financial transaction known as a “short sale.” This transaction occurs, so a company can realize the profits from the sale, but must then pay for the price difference to another party. Many investors have become wary of using these techniques, because it seems like an unfair advantage for one party to gain while another suffers.
Gamestop has become infamous among savvy investors for using this strategy. Back in April, the company released a strongly promoted tweet blasting the release of Plants Vs. Zombies: Season 3. The tweet included a link to the new game, which had yet to debut at any other location. In the tweet, the firm announced that the newly released game would cause a “groundbreaking launch this Friday.” Gamestop investors responded by rushing to purchase the shares on the stock market, driving up the share price above the cost to buy them.
The problem with this move is that most investors did not understand that the best way to determine the value of a stock is to use a moving average. The Moving Average Convergence/Divergence, otherwise known as MACD, is a technical analysis indicator used to show how a stock is moving in relation to other stocks within the same category. For instance, if you look up Bestselling stocks of the past year and look up the share price of those stocks, you can plot the MACD line. Once you find the line, that indicates that the share price is overbought and the stock is moving down.
This is what makes gamestop a prime target for people who want to manipulate the media outlets. The company releases a strong quarterly report, highlighting positive earnings. The next day, the share price begins to drop rapidly. What these investors do not realize is that the drop was caused by the media outlets pushing the stock price up so high that retail investors were overpaying for the stock.
These same traders, or hedge funds, use this same technique when seeking out stocks that are low priced. In order to make money off of low cost stocks, hedge funds buy shares that are offered at a discount to the full market price. The discount price is typically below the book value of the stock because the hedge funds have to pay out more in commission to buy the shares. Because the discount is so low, the retail investor is now paying less than the actual market price. If you buy shares like this at a discount, you can turn a profit. You will make more if you also trade shares at a discount if the stock rises in value.
Gamestop has been accused of engaging in short selling on a scale not seen in the financial markets in many years. Short selling is a practice where the seller sells shares of stock that are not listed on the Nasdaq. While short sellers can earn a handsome profit, they employ what is called a “short squeeze” to accomplish their feat. In short-selling, the seller hopes to drive up the share price enough to leave a buyer who wants to take a chance on the stock, and then realizes too late that it was indeed a bad move.
Gamestop is the most popular short seller in the United States by far. One can learn more about shorting shares using a “Shorting Strategies” training course at any number of websites that offer this type of training. It is important to do extensive research into this practice before going into the market with an expectation of making a fortune. While there is certainly risk involved with this practice, the potential for a large windfall is not out of question.
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