Business
I’m having a quick chat today with Natalie Ferguson today – she’s the head of product at Hatch, one of NZ’s online share market investing platforms that gives investors access to the US.Imagine that you decided a month ago that you wanted to invest in Gamestop.. You could have purchase shares at the start of 2021 for around $20 – a couple weeks later you would have seen the price hit around $450 each. Wow! – You’d be pretty pumped, that is, until you tried to sell. Due to some reasons we’ll cover in this episode – this is exactly what happened. Trading was halted at the worst possible time for retail investors: People who bought in, may have experienced a meteoric rise in their portfolio, but then they found it impossible to sell to realise the gains. Since the news of this broke, the share price has been floating down like a wet feather to where we’re at now at the time of recording of $50 each.What does it mean to short a stock?Shorting is when you borrow a stock from a broker, then sell that stock at the market value today, with an expectation that you can repay that share by acquiring it again at a later stage, hopefully at a much lower price. With shorting, you sell high, then buy low (contrast this with ‘going long’, where you [hopefully] buy low and eventually sell high. By shorting, you can profit from the price of a share declining – larger players in the sharemarket, hedge funds, will often identify companies that are likely to face a decline in value in an attempt to benefit from their demise through shorting.Now I’m not describing a tool here that you should be using, this is just for background – in fact, unless you’re involved in trading actively (and using a platform made for that purpose), it would be a bit unusual to see everyday investors shorting.So going back to Gamestop, what we’ve seen is what’s also known as a short squeeze. Hedge Funds that were shorting Gamestop were waiting until the price dropped further – that’s what they expected would happen because remember, this company sells video games in physical malls. So these hedge funds ultimately need to re-purchase the stock (hopefully cheaper) to repay the borrowed stocks. Now what happens when you’re short and the price rises as in the case with Gamestop? You have to either hold on for the ride, or close out your position and purchase the stock to do it. Like sitting in the car in the sun, windows up complete with farting and complaining children– you can only hang on so long then you have to crack a window right?So, a rising share price due to increasing demand, along with short sellers covering their position, gives you what’s known as a short squeeze. The result is that it further intensifies the upward momentum in price.A special thanks again to the listeners of the show who messaged me last week asking me to cover this topic.One other thought I want to leave you with before ending this episode if I may. I’d love to suggest this is a simple story of David and Goliath – but in reality, just like with David and Goliath, there was conflict brewing beforehand, and there was conflict afterwards. This saga has shown us that something’s going on, but for those ‘sticking it to the man’, the man has only just noticed your strategy. Technology, and more importantly, organised groups of people using technology, has the power to change the way investing works going forward. With any war, there will be some destruction, but there’s also going to be opportunity. Hedge funds perhaps need to make some changes, but the opportunities that were really only theirs to exploit, has now been released to others. For a more comprehensive and deep dive into what's happened, stay tuned to the show, but also check out this video from Brent Osachoff________________________________________________________________The NZ Everyday Investor is brought to you in partnership with Hatch. Hatch, let's you become a shareholder in the world's biggest companies and funds. We're talking about Apple and Zoom, Vanguard and Blackrock.So, if you're listening in right now and have thought about investing in the US share markets, well, Hatch has given us a special offer just for you... they'll give you a $20 NZD top-up when you make an initial deposit into your Hatch account of $100NZD or more. Just go to https://hatch.as/NZEverydayInvestor to grab your top up. __________________________________________________________________Like what you’ve heard?You can really help with the success of the NZ Everyday Investor by doing the following:1- Tell your friends!2- Write a review on Facebook, or your favourite podcast player3- Help support the mission of our show on Patreon by contributing here4- To catch the live episodes, please ensure you have subscribed to us on Youtube: 5- Sign up to our newsletter hereNZ Everyday Investor is on a mission to increase financial literacy and make investing more accessible for the everyday person!Please ensure that you act independently from any of the content provided in these episodes - it should not be considered personalised financial advice for you. This means, you should either do your own research taking on board a broad range of opinions, or ideally, consult and engage an authorised financial adviser to provide guidance around your specific goals and objectives._____________________________________________________________________________