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article imageQ&A: GameStop frenzy and what traders need to know about shorting Special

By Tim Sandle     Feb 20, 2021 in Business
What is behind the recent surge in shorting of specific stocks including GameStop and what do individual traders need to know? To gain a perspective, Digital Journal spoke with an executive of a NASDAQ listed company.
To gain insight into the economic and financial issues surrounding the GameStop shockwave, Digital Journal caught up with Steve Wyett, the Chief Investment Strategist for BOK Financial (NASDAQ: BOKF).
Digital Journal: Can you help explain what has transpired over the last few weeks with stocks such as GameStop?
Steve Wyett: Entering 2021, stock of GameStop, the video game store you see in malls, was one of the most shorted of all publicly traded companies, meaning that many investors were betting on the price of the stock to drop. Then, in mid-January, a group of members on the online discussion platform Reddit banded together to buy shares and drive up the price. As more and more Reddit users bought stock, the price of GameStop shares soared, creating an ever-growing liability for short sellers. This frenzy of individual investors buying the stock forced the short-seller hedge funds to buy back shares of the stock they had sold short at even higher prices to limit their losses. The frenzy drove GameStop stock prices up more than 400% in a week and up more than 1,700% since the start of the year.
DJ: What exactly is shorting, and how does it impact the market?
Wyett: Short selling isn't new—but it's not exactly common. Most investors follow the "buy low, sell high" format, but short sellers do the opposite—they borrow and sell a stock when it's high and bet that it will continue to fall.
Imagine you have a friend who sells baseball cards. You research the baseball card market and think certain cards are going to go down in value. So, you borrow a few cards from your friend, promising to pay them back later. You sell the cards for their current market value, and the value does fall-- your prediction was right. Then, you buy back the cards for less than you paid for them, return them to your friend, and pocket the profit you made. That's shorting.
DJ: Are these situations ways for traders to make money?
Wyett: Short selling allows market participants to profit from declines in the value of a security. However, if the price doesn't fall, a short seller may be forced to buy back shares to minimize potential future losses.
DJ: What kinds of strategies should traders be thinking about for the future?
Wyett: The number of trading strategies employed within the markets today is vast-- long stocks, short stocks, buying and writing call and put options, exotic option spreads, paired trades and many more outside of this list.
The key aspect of trading is identifying, knowing, and understanding the risk/reward potential and considering the level of risk against one's willingness and, importantly, ability to accept risk. All investors like to make money, and the lure of making significant returns is powerful. But successful traders, and investors, understand how to avoid taking the kinds of risk that can wipe them out. Over longer periods investing in a broadly diversified portfolio consisting of many different asset classes that, together, exhibit the kinds of risks and rewards suitable for your risk profile has proven to be successful. Shorter-term strategies with widely varying amounts of risk and return need to be considered carefully and pursued as a part of one's overall investment strategy.
DJ: Do you think we will continue to see these kinds of anomalies throughout the year?
Wyett: There are always anomalies in the capital markets. What they are and how long they last is ever-changing. Not surprisingly, anomalies that allow investors to make money quickly attract more money until the potential profits generated by the anomaly disappear. And history also shows those late to the strategy generally suffer more losses than gains.
There is no single market anomaly that exists and allows investors to always make money. Anomalies appear, disappear, and then reappear, so it can be said the markets always provide some level of opportunity. No matter which way prices move, there are strategies that allow an investor the chance to profit-- if they guess right. As mentioned before though, this opportunity to profit comes with the risk of loss.
More about Gamestop, shorting, Economy, Trading
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