short squeeze explained for dummies In this video, we take a look at how does short-selling a stock work? What does it mean to short sell a stock? Is short-selling stock a good idea? Is short selling illegal? What happens if you short a stock and the price drops? In recent weeks we have seen Gamestop stock being one of the most heavily shorted stocks in the stock market which resulted in the famous wallstreetbets short squeeze, but before we get to that we need to first understand what is short selling also known as Shorting, or going short Shorting, or short-selling is when an investor borrows shares and immediately sells them, hoping he or she can scoop them up later at a lower price, return them to the lender, and pocket the difference. But shorting is much riskier than buying and holding the actual stock, or what's known as taking a long position. ( do an illustration) To make an illustration we will use bananas, so these will represent our shears and each banana is worth $50, I know what you are thinking. What! a banana that’s worth $50 dollars. Yes! you see some stocks are overvalued or undervalued and these are like high-tech bananas you eat one and you never have to eat again. Now let see how it works A trader we going to call him trader A it can be a group of traders but we just going to call them trader A, So trader A, goes to the lender and borrow five banana stocks each worth $50 but the trader believes that these banana stocks are way overvalued then he immediately sells them at the current market price Now The trader doesn't have the stocks that he earlier borrowed from the lender but only holding cash, With the assumption that the stock will go down in value to let's say $20 per share, if his assumptions are correct he will then buy back these shears at $20 and return them to the lender. Plus interest of $10 per share. The lender then gets back his five stocks and makes $10 per share which makes a total of $50 profit on interest The trader makes $20 profit per share so that’s $100 on this pocket, now he can go and buy a Lamborghini well in this case he will probably get a toy Lamborghini Now let look at this from a different scenario what if the trader’s assumptions were wrong, what if banana stocks were not overvalued at $50 per share? Now let introduce our next guest trader B again it could be a group of people What if trader B actually thought banana stocks were very cheap- undervalued at $50 because these are high-tech bananas remember? Then he or they came to the conclusion that this was a product of the future and therefore started buying banana stocks which course the price to move from $50 per share to $200 per share. Remember the trader A borrowed five shears from the beginning and sold them at the market price of $50 at the time, but now cause other traders are buying these shears they have actually gone up in value Witch is the opposite of what trader A had anticipated This is now called a short squeeze The trader is now forced to buy back the stock at $200 per share to return them back to a lender. The lender doesn’t care whether the shock is worth $1 or $1000. The only the lender cares about is that trader A returns the exact number of borrowed stock plus interest So trader A was forced to cover his position by buying back at $200 per share if he did not buy at $200 and the price kept going higher that would mean his losing more and money as eventually, he would have to buy and return the borrowed stock If the price keeps going up for a longer period the lender may force the position to be closed as that threatens the likelihood of the shares being returned. #ShortSqueez #vusidesigner