Last week the stock market experienced something never before seen: The stock price of companies that have been struggling for quite some time started to rise quite rapidly!
This resulted from a group of people that rallied together to buy these underperforming stocks. While many got involved with the sole purpose of making a “quick buck” from the rally, others saw it as a mission: Getting in the way of massive hedge funds that benefit from betting against businesses that have lost their way.
In this quick yet informative post, I break down what “shorting” means and how that differs from real investing. As with any topic, there is so much more that can be said. However, I wanted to keep it simple and to the point.
First things first:
The standard way to invest is to buy stock in a company expecting it to go up in price.
People (or institutions) that Short Stocks, however:
Do it with the expectation that a company will fail and plan to benefit from that company’s stock dropping in price.
The danger with shorting stocks:
It is typically done with “borrowed money.” In other words, when shorting stocks, you are using a loan from the online broker to bet against a company.
Shorting is a HUGE gamble because:
If the company’s stock starts to rise instead of falling, the people shorting will start to owe a lot of money. Why? Because there is no ceiling when it comes to how high the price of a stock can go!
In the case of GameStop, AMC, and others:
What happened is called a “short squeeze.” A massive amount of people started buying these struggling stocks, which made the prices rise significantly. The people on the “shorting side” started losing BILLIONS.
To “stop the bleeding,” these shorting companies (mostly Hedge Funds) had to close their short positions. This came across as a win for the “average person.” Many have made some money simply for “joining the rally” and grabbing shares. Meanwhile, some of these private wealth institutions lost a whole lot.
While I can understand the excitement that comes from making a “quick buck,” especially at the expense of these massive institutions trying to benefit from failing companies, I want you to understand that what has been happening with GameStop, AMC, etc.
It is called GAMBLING and SPECULATION. It is NOT investing in any way, shape, or form.
Real Investing means:
Doing your research and buying stock in a company because you believe it’s a quality business with a strong foundation. A business that will likely thrive and succeed in the future. And, in turn, so will your investment. When you invest, you hold on to your shares for 3-5+ years. Not 3-5 minutes or days.
The bottom line is this: If you’ve been participating in what has been going on, that’s all good. However, make sure you understand that you are not investing. You are gambling.
Questions? Comments? Share below! You can also email us: Hello@girlsonthemoney.com
Cheers to HEALTH and Profits,
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