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You can buy a stock you don’t own yet, and hope the price goes up, so you make money.

You can sell a stock you already own, hoping the price goes DOWN, so you don’t lose any money.

When you buy a stock, your risk is limited: you can only lose as much as you paid for the stock, they can’t come after you for anything else.

But if you have a brokerage account and they give you certain permissions (you have to have enough money and have a clue what you’re doing...)

You can short a stock.

That means, you BORROW some shares from the broker. You SELL the borrowed shares. You are hoping the stock prices goes DOWN.

When the stock price goes down, you buy the stock back at the lower price, and give those back to your brokerage. You get to keep the difference in price.

The risk in a short is, NOT just the amount the stock cost when you shorted it. What if the stock goes up? What if the stock was at $1 / share. So you borrowed and sold 2000 shares, for $2000. Great, when the stock goes to 50 cents, you buy it for $1000 (2000 shares times half-a-buck-per-share), and give the shares back, and you’ve made $1000.

Clear so far?

Now, what’s the risk in a short? Let’s say you sold 2000 borrowed shares for $1 apiece. Now let’s say that company announces they’ve discovered the cure for liberalism. Their stock goes to $1000 / share !! Now you have to come up with, $2, 000, 000 — a cool two million — to buy your 2,000 shares back.

In theory there is no limit to what you might owe, by shorting a stock.

Hang on, because it gets worse.

Now there are two kinds of shorts — not joking, despite the pun — regular and naked. In a regular short, your broker actually has the shares to borrow. In a naked short, they’ve sold more shares than actually EXIST.

So when it comes time to buy them back — it’s like all 3 of the Three Stooges trying to go out the same door at the same time. EVERYBODY wants the stock. But there isn’t enough to go around. So the price goes UP. That makes all the people with shorts on the stock, go even FURTHER into debt. And so on.

(There’s a rule that you can’t buy back your shares in a short until the price temporarily drops a bit. So what does that rule do, if it just keeps going UP?)

But there’s one more nasty ingredient.

There are organizations called “hedge funds” — for rich people (net worth usually in the millions at least, or at least (say) $250,000 yr in income, sometimes more than that.) They are called “hedge funds” because they provide a hedge, a shelter, against risk and uncertainty.

Sometimes what the hedge funds do — and this is kinda near the border of what is legal — is, they see a stock of a weak company. And they informally say, “We iz ALL gonna short that stock at once, and drive the stock down, and that’ll bankrupt the company but make us rich, so YAY US!”

Some hedge funds tried to do this to GameStop. The rationale on the surface, was, hey, retail store + COVID == business sucks. But GameStop had two things.

Some e-commerce Fanbois who are gamers / weaponized autists, who know how to use every chink in the rules to win. So when the hedge funds said, “Let’s short GameStop” the autists said, F this S, we’re gonna buy and drive the price UP.

And the hedge funds (who were doing naked short selling) got caught with their pants down, bigtime. If you owe too much on a short, your brokerage fund, or bank or whatever, can FORCE-sell other stuff you own, to make sure you’re good for the money on the short. That happened to the hedge funds here: I’ve read anywhere from 6 to 14 BILLION in losses so far.

So now they’re squawking to the FTC and lawyers and Congress and everybody, “Waah! Those nasty redditors aren’t letting us bend the rules!”

Hilarity ensues.