Don't knock the disposable earbuds... American Airlines has two major things not going for it. One: it's an airline during a deadly pandemic. Two: it lost a record $8.9B last year, and doesn't expect a rebound any time soon. That's partly why American has been the most-shorted US airline. Coincidentally (but not at all), American stock soared 17% from Monday to Thursday. And that's likely partly thanks to Reddit.
- Many meme stocks celebrated on the r/wallstreetbets subreddit are heavily-shorted companies that hedge funds are betting against. Like: GameStop and Bed Bath & Beyond.
- Individual investors are participating in mass meme stock buying campaigns. It’s part experiment, part profit-seeking, and part rebellion – a chance to “get back” at Wall Street insiders, who Main Street still resents for the wreckage of the '08 financial crisis.
The DL on short sells... So how exactly are they "getting back" at Wall Street? It all goes back to short selling: Basically, some professional investors borrow shares of a company whose stock they think will fall. Then they sell those shares, hoping to buy them back later at a lower price and return them to the broker. If the shares fall, their profit = the difference between the price when they sold the shares and the price when they bought them back (minus interest on the loaned stock, and any transaction costs).
- By piling into shorted stocks, small investors were able to drive up share prices, causing some hedge funds to lose billions. Some funds bought back shares to avoid even more losses, which drove up prices even more.
- Shorting is risky because the loss potential is theoretically unlimited, since the shorted stock could keep rising. Meanwhile, the gain potential is limited to what the shorter sold the shares for (because in the "best" case scenario, they can fall to $0).
- Buying a stock is the opposite. The most you can lose is the money you invested, while your potential gain is theoretically unlimited. But short selling has some positives: for example, it can expose overvalued stocks.
Retail investors turned the tables... on professional investors like hedge funds. Like Matt Damon in Good Will Hunting standing up to the snooty Harvard student, retail investors said: "How do you like them shorts?” It’s not clear how much we’ll see this trend in the future. And it’s possible that professionals are getting in on the Reddit buying, too. After last week, it's likely that hedge funds will reevaluate their positions in heavily shorted stocks.