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“As soon as you can explain to me how these hedge fun guys can put a farm on a ship and move it out of the country, I’ll be able to follow this.”
If you wind up owning the company that owns the farm, you don’t have to put it on a ship.
We understand that when more shares are for sale than their are investors who want to buy the price of a share goes down, right? And we believe, usually rightly so, that when the price drops low enough, the stock will look attractive to more and more buyers, and the price will level off - maybe down a few percent from the beginning of the day, maybe up.
But what if the selling continued and continued and continued? What if a hedge fund not only sold the shares they owned, but sold short, which means they borrow stock to sell, and then buy back in at a later time to repay the stock they borrowed. That would put more downward pressure on the stock because it represented more selling.
But in this scenario the damage they could do would be limited - because they would have borrow stock that actually existed.
Now let’s take it to the max. What if they were short selling stock that they didn’t even borrow? Now there there is NO limit to how much downward pressure they could exert on a small cap stock. Buyers would eventually dry up and the stock would go into a freefall.
Small investors like you and I would either get stopped out or sell out of sheer panic, as we watched our investment fall to a fraction of its worth.
At the end of it all, a few things could happen. the naked shorters could cover at a fraction of the original price and make a killing.
Or someone could buy a controlling interest in the company for a fraction of its true value by buying a majority of the deflated stock.
Or the company could go bankrupt, making the naked shorters a 100% profit because they then never have to buy anything to cover.
You and I certainly aren’t buying back in - the company is a disaster, and besides, the financial media is now reporting whispers of accounting irregularities, or some other damaging rumor.
And remember, it is the small investor in small cap companies that is getting fleeced.