Can someone explain what this means as though epxlaining to an eight year old child?
That's so fitting since this is a fairy tale.
All the reddit boys and girls are really, really excited, after just having gotten a dollar bill under their My Pillow from the Tooth Fairy. Now they are wishing for a new pony. But sadly, they are going to find out that the Tooth Fairy only does dollar bills, and only once a year on their birthday.
What, specifically, needs explanation? You do understand simple economics eg. how demand and supply impacts price, right?
Well for starters, there has been a long running theory - some will say conspiracy theory - that the big banks, JP Morgan in particular, has essentially cornered the trading of silver on the commodities exchanges. I don't know, seems implausible (see the Hunt Brothers, they went broke trying to corner silver decades ago). But they may in fact handle the bulk of the trading and/or clearing of trades in the exchange. Normally, an investment bank's clearing/market making desks don't take a position, they just make money from spread between bid price and ask price, and commissions. But the (conspiracy) theory is that they are massively short silver as a means to prop up the US dollar. It gets complicated for an 8 year old after this.
When you short a stock, it basically means you are borrowing the stock from someone else, sell it into the market today hoping the price will go down in the future, after which you can buy it cheaper and return the borrowed shares. The same would be true somewhat for commodities like silver. You can short silver at $27, and if it drops to $23 you can buy it back and pocket the difference.
Anyway, I think it is pretty well proven that there are exploits in the stock market that have been used by short sellers (people betting the stock will go down) and recently, as in GameStop, there was so much money betting on the short side that there were no more shares truly available to short. It gets more complicated from there, even in such a situation it is still possible to short more using options and if you are a big player your bank will "work with you", but the fewer shares available to borrow it gets incrementally harder to short more. What the reddit flash mob did was notice that the short interest in GME was so high that if they could gather enough people to bum-rush the market to buy GME shares in a very short period of time, it would drive the price up and the short sellers would be on the hook for potentially infinite losses. So when GME went from $20 to say $60, the shorts lost 200% of their investment and had a decision to either short more, or buy back in. The problem is for shorts is that you need 100% collateral so if you are short at $20 you need $20 in cash or equity value. And if the stock goes to $60, you need $60 in cash or equity value. So it can get almost as expensive to hold the short position as it is to cover if you don't have lots of liquidity. Eventually many of the shorts in GME capitulated and "bought to cover" to close out their short positions at a loss (because they wanted to cut their losses, or because they didn't have excess cash/equity reserves), thus increasing the demand for shares higher than the flash mob demand created, and thus pushing the price higher still. As they are buying to cover in a market where a flood of new long investors are coming in you have what they call a 'short squeeze' where the shorts are pretty much forced to buy back the borrowed shares at the much higher price. From $20 to $325 (or, $480 I think at it's mid-day high), it's a massive loss that few people can bear. There are more dynamics (such as when the price goes from $20 to $60, new shorts want to come in and the cycle perpetuates). That's the squeeze.
Long story short, some are speculating that this flash mob is going to try to do the same to the silver market, betting that there exists an oversized short position in silver and that by going long they can squeeze the silver shorts, in particular JP Morgan.
If you have questions fire away or send a PM. This board has a lot of very knowledgeable people. Crowd-sourced knowledge, just like "crowd sourced" flash mob of investors :-)
This is about naked short selling, which is illegal. A legal short sell simply mean you borrow a stock from someone, sell it at market value, then wait some short period of time for the price to fall, and then you buy that stock back at the lower price and give it back to whom you borrow it. You keep the profit between when you sold it and when you bought it back at a cheaper price.
Naked shorting is when there actually isn’t a stock borrowed, but someone claims there is. This is fraud, and it happens routinely as the SEC does nothing about it because it involves very large and powerful houses who donate to political parties.
Here is an example of a legal short sell. 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.