Dumb Money: What is shorting a stock?

Dumb Money, a new movie chronicling the notorious GameStop Reddit short squeeze, is on Netflix now – but what does it mean to “short a stock”?

The stock market isn’t usually the plaything of normies. Sure, we have an awareness of it, either through the doom of 2008 or the fluctuating wealth of Jeff Bezos and Elon Musk, but it’s usually reserved for those with either a lot of money or a fascination with cash.

However, in January 2021, a large collective of online investors banded together in aid of GameStop, a retailer that limped through the pandemic and seemed to be destined for nationwide closure.

Understanding exactly what went down between the “apes” of r/wallstreetbets and hedge fund operators can seem complicated, but it all comes down to shorting stocks – so, since Dumb Money has dropped on Netflix, we’re going to explain it as simply as possible.

Dumb Money: Shorting stocks explained

When you “short” a stock, you effectively bet on its failure: if the stock goes down in value, your returns will be higher.

Think of it like this: let’s say you borrowed 10 brand-new copies of a video game from a supplier. While borrowing them, you actually sell them for $60 a piece, giving you a sweet $600.

A week later, the critical consensus is poor, the audience reception is measly, so the value of the games drops to $25 each. So, you go back to where you sold them and buy them all back for $250. Then, you take them back to the supplier you borrowed them from, having pocketed $350 profit. That part is known as “covering”, regardless of gain or loss.

However, let’s say the game is a massive success upon release. So much so, in response to crazy demand from customers, the price of the games goes up to $80 each. After you buy them all back and return them to the supplier, you’ve lost $200.

Now scale that up to millions upon millions of dollars, and that’s the story of GameStop. It’s also the subject of The Big Short, in which a small group of Wall Street guys betted against the housing market prior to the financial crash, knowing it would fail.

The r/wallstreetbets subreddit, armed with more than two million members (now at nearly 15 million “degenerates”), caught on to this happening with GameStop and decided to buy up the stock. It had a “negative float”, which means more shares had been shorted than were actually in circulation.

As more Redditors bought shares, demand for shares increased, causing the price to keep ticking up and up and up. Seeing the amount of money they’d be losing – when it comes to shorting stock, it’s theoretically infinite – hedge fund managers rushed to sell their shorted shares to recoup some of their money and prevent insolvency. However, in doing so, share prices increased massively. This is known as a “short squeeze.”

Dumb Money is streaming on Netflix now.