My biggest concern here is the company Game Stop. What will happen to them now?
Despite all of the descriptions of short selling, I still do not understand the process. I think the only way for me to understand would be to go through a short sale process (preferably simulated) so that I can see exactly what takes place.
4 major topics:
Short selling is very simple.
1. Person A owns a share of stock.
2. Person B thinks the price of that stock is going to go down.
3. Person B borrows a share of stock from Person A, but only for a defined period of time, say 30 days.
4. Person B also pays Person A a flat fee, say $1, to borrow that stock.
So, Person B has a borrowed share of stock that they have 30 days to return and pay a $1 fee to Person A.
5. Person B then sells that share for say $10 (whatever it is worth on the market at that time).
6. Person B then waits up to 30 days for that stock price to come down from the $10 price they originally paid.
So, Person B has $10 in their pocket, but they must buy a share of stock back within 30 days to give back to Person A. They hope like hell that the stock price is less than the $10 they sold the original stock at.
Two things can happen: Stock price goes down or the stock goes up. Either way, Person B must buy a share to give back to Person A.
Price goes down, say to $6.
7. Person B buys a share of stock at $6.
8. Person B gives Person A their share of stock back, plus the $1 fee.
9. Person B had $10 from originally selling the borrowed share of stock. They paid $6 for another share to return to Person A and they paid Person A the $1 fee. This means Person B kept $3 ($10 - $6 - $1 = $3) for themselves, a nice and tidy profit of $3.
Price goes up, say to $14.
7. At the end of the 30 day period, Person B finds the stock actually went up to, say, $14. They are screwed. They must buy a share of stock at market price of $14 to return to person A.
8. Person B had the original $10 in their pocket from selling the borrowed share of stock, but they must fork out another $4 to have the $14 to buy the share of stock to return to Person A. Plus, there is that $1 fee.
9. Person B must pay out $15 total, and therefore has lost $5 in this transaction.
This shows that shorting a stock can result is significant losses if the stock price goes up and not down. Imagine a $10 stock going to $200! Shorting that stock in this scenario may make up to the $9 for Person B, but it can also result in losses of $191 if the price goes to $200.