What is short selling? This analogy explains why GameStop Stock hurts hedge funds

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A screenshot explainer helps recruits understand the concept of short selling, after the GameStop case brought the concept to public attention.

Short selling is the practice of borrowing a stock and reselling it, with the expectation that its price will drop, allowing the seller to later buy it back at a reduced price and return it to the lender, while keeping the profit.

The practice is covered in detail in the 2015 film The big court, which explains the subprime crisis that led to the 2008 economic crash.

However, with the video game retailer’s share price GameStop increases by 8,000% in six months, as a group of DIY investors scrambled to protect their position in the company and kick out short-selling hedge funds, the concept is back in the public domain and an explanation is necessary.

Where is it Twitter User SteveyJ enters. Responding to podcaster Darius Soriano’s request for a straightforward explanation of Gamestop’s history, SteveyJ posted a screenshot explanation, complete with monkey, snake, and banana emojis to explain what was going on.

Entitled “Let’s dumb this down for you monkeys”, the note captured on screen breaks down the Gamestop saga into a series of simple steps. SteveyJ explains in his accompanying tweet that in the analogy “ordinary people are apes and hedge fund people are snakes”.

The graphic reads, “Let’s say 5 bananas currently cost $ 10. A monkey in the market has 5 bananas. Nake asks to borrow 5 bananas for a little and sells the 5 bananas instead. Can buy them later for less. and give them back to the monkey, then he makes a profit on the difference.

“A group of monkeys notice what the stupid snakes are doing and decide to buy all the bananas in the market until the snakes have no choice but to buy from the group of monkeys in order to make this that they borrowed. If the group of monkeys stays strong, the price will go up. go up. “

GameStop’s individual investor group has posed a serious challenge to well-known hedge funds like Melvin Capital, costing them $ 23.6 billion last month alone.

Investors used the Reddit r / wallstreetbets advice to get organized. Under the nickname WSB, the board describes itself as “As 4chan has found a Bloomberg Terminal “, referring to the bulletin board and widely used trading software.

The unprecedented GameStop saga began last September, after investor Ryan Cohen took a 13% position in the video game retailer and began pushing for it to shift its online sales in an effort to compete Amazon.

A number of individual investors, often using apps like Robinhood, have followed Cohen’s lead and invested in shares of GameStop.

However, the big hedge funds saw the attempt to challenge Amazon as doomed and began to buy stocks in order to sell GameStop short, drawing the lines of a battle between individual investors and professional financiers that has since caught the imagination of the public.

While the above analogy may provide some clarification for some newcomers, one respondent points out that it does not fully explain the situation.

“That’s good, but also imagine that there were only 15 bananas in the world and the snakes sold for $ 21 for $ 10 by borrowing them again,” said Abhay Vamarajha, complicating matters further.

GameStop in Hollywood busy with customers queuing to enter the video game retailer on January 27, 2021. The video game retailer is at the center of an unprecedented standoff between individual investors and hedge funds striving to short sell the shares of the company.
AaronP / Getty

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