Thanks to the digitalisation of video games, compounded by the pandemic,<\/span> GameStop was struggling in the past year. Their physical shops – the basis of<\/span> their business – weren’t doing well.<\/span>\u00a0<\/span><\/p>\n In April last year, their shares were priced at $US3 and were expected to fall.<\/span> Instead of slumping, though, they surged.<\/span>\u00a0<\/span><\/p>\n Why? Because a group of people on Reddit wanted to disrupt Wall Street, the<\/span> home of the New York Stock Exchange. And they did so, extremely<\/span> successfully.<\/span>\u00a0<\/span><\/p>\n Sooo… why do I keep hearing about ‘shorting’?<\/b>\u00a0<\/b><\/p>\n ‘Shorting’ is basically betting, but for really rich people. It’s when investors<\/span> guess a company’s share price will drop and so place money on it.<\/span>\u00a0<\/span><\/p>\n Let’s pretend that instead of a share, it’s a new dress.<\/span>\u00a0<\/span><\/p>\n I borrow a dress worth $100 from a friend. I decide to sell that dress to a local<\/span> market for $100, predicting no one will want it and I’ll soon be able to buy that<\/span> dress on sale. I return a few months later and I was right. No one wants the<\/span> dress. It’s now on sale for $60 and I buy it. I have made a profit of $40 – the<\/span> difference between what I sold it for, and the cost of replacing it. I then return<\/span> the dress to my friend. In financial terms, this is called ‘shorting’.<\/span><\/p>\n This is risky because fashion is unpredictable. If that dress suddenly becomes<\/span> trendy, then its price could go up. Let’s say the dress becomes stylish, and the<\/span> dress is now selling for $140. That’s annoying, because I still have to return this<\/span> dress to my friend. So I buy it, before the price goes up even further. In this<\/span> case, I’ve lost $40, because I bought it back for more than I originally sold it<\/span> for.<\/span>\u00a0<\/span><\/p>\n This is what happened when wealthy people shorted GameStop shares,<\/span> predicting their value would decrease, but it actually increased.<\/span>\u00a0<\/span><\/p>\n How did it happen with GameStop?<\/b>\u00a0<\/b><\/p>\n A few US hedge funds shorted GameStop’s stock. (A hedge fund is a high-risk<\/span> investment fund that is usually reserved for very wealthy investors.)<\/span>\u00a0<\/span><\/p>\n Enter: Reddit. Specifically, a subreddit called “WallStreetBets”, which has<\/span> about two million subscribers.<\/span>\u00a0<\/span><\/p>\n Some people on Reddit noticed that a few hedge funds had shorted millions<\/span> of dollars of GameStop shares. They thought it would be a good idea to ‘stick<\/span> it to the big guys’ and force their bets to fail.<\/span>\u00a0<\/span><\/p>\n The Redditors’ plan worked and the hedge funds lost their bets badly.<\/span>\u00a0<\/span><\/p>\n Shares in the company are currently at $US325 ($AU424), which is an increase<\/span> of 1,700 per cent from one month ago.<\/span>\u00a0<\/span><\/p>\n Those hedge funds have since had to buy back GameStop shares at the<\/span> inflated price to return them to the brokers they initially borrowed them<\/span> from.<\/span><\/p>\n Hedge funds = not happy.<\/span>\u00a0<\/span><\/p>\n Money = lost.<\/span>\u00a0<\/span><\/p>\n Melvin Capital, one of the hedge funds who had short-selling bets in<\/span> GameStop, lost 53 per cent of their investments in January, according to <\/span>The<\/span><\/i> Wall Street Journal<\/span><\/i>.<\/span>\u00a0<\/span><\/p>\n Why do I keep hearing about something called Robinhood?<\/b>\u00a0<\/b><\/p>\n No, the legendary outlaw Robin Hood has nothing to do with this.<\/span>\u00a0<\/span><\/p>\n Robinhood, rather, is an American app that allows users to trade stocks<\/span> commission-free. Many Redditors were using Robinhood to buy GameStop’s<\/span> shares.<\/span>\u00a0<\/span><\/p>\n The app is targeted to younger people and specialises in low-cost trading –<\/span> the perfect platform for amateur investors.<\/span>\u00a0<\/span><\/p>\n But on Friday, Robinhood suddenly banned users from buying GameStop<\/span> shares. This manipulation of the market infuriated its users, because people<\/span> saw it as Robinhood trying to protect the hedge funds – an accusation<\/span> Robinhood denies.<\/span>\u00a0<\/span><\/p>\n American congresswoman Alexandria Ocasio-Cortez also got involved,<\/span> tweeting: “This is unacceptable.”<\/span>\u00a0<\/span><\/p>\n Her tweet gained support from billionaire Elon Musk and right-wing senator<\/span> Ted Cruz.<\/span><\/p>\n Robinhood has since lifted their restrictions, allowing amateur investors to<\/span> invest in GameStop again.<\/span>\u00a0<\/span><\/p>\n WHY CAN\u2019T THIS HAPPEN IN INDIA?<\/b>\u00a0<\/b><\/p>\n Short squeeze<\/span>\u00a0<\/span><\/p>\n It is basically is a phenomenon in which the trader who has short sold the shares buys the stock at a higher price to<\/span> cover the losses. A buying by the short seller further pushes the price of the stock leading to a situation called short<\/span> squeeze.(that is what the hedge funds had to do)<\/span>\u00a0<\/span><\/p>\n This is exactly what happened in case of the company Gamestop.The traders anticipated a short squeeze situation in<\/span> the stock.<\/span>\u00a0<\/span><\/p>\n So now the question is can this happen in India?<\/span>\u00a0<\/span><\/p>\n There are basically two aspects in it. One do the derivative market regulations allow such trade to happen in India<\/span> and second what are the legal implications of it.<\/span>\u00a0<\/span><\/p>\n The regulations put in place by the Securities and Exchange Board of India (SEBI), it is very difficult to<\/span> carry out such trade in India.<\/span>\u00a0<\/span><\/p>\n There are a few reasons behind it. One, in US brokers are allowed to lend shares to the<\/span> traders. So, they keep shares in a pooled account, which makes lending possible.<\/span> H<\/i><\/b>owever, In India the shares are kept in the demat account of the particular trader and brokers are not<\/i><\/b> allowed to use them for lending. \u201cIn India the regulatory environment is stricter. Lending in stocks has<\/i><\/b> to be done through an Exchange platform called Stock Lending and Borrowing Mechanism (SLBM).<\/i><\/b>\u00a0<\/i><\/b><\/p>\n Also, legally there are regulations which prevent traders from manipulating stock prices.<\/span>\u00a0<\/span><\/p>\n SEBI has regulation under the Prohibition of Fraudulent and Unfair Trade Practices relating to the<\/span> Securities Market, which defines manipulative and unfair trade practices and prohibits a trader or investor<\/span> from carrying out such practices,<\/span><\/p>\n If SEBI establishes that an activity is conducted for the purpose of manipulating the stock price of a<\/span> company, such persons can be liable under the law.<\/span>\u00a0<\/span><\/p>\n It is impossible to create that kind of short squeeze in India. SEBI and stock exchanges closely regulate<\/span> Stock Lending and Borrowing Mechanism (SLBM) which itself is reviewed half-yearly. Also, SEBI and<\/span> Stock Exchanges have robust surveillance systems and any concentration in stock or F&O is keenly<\/span> watched through limits on market-wide position limit (MWPL)<\/span><\/p>\n To structure your\u00a0CAT online preparation<\/a>\u00a0in an efficient way consider joining iQuanta which is a\u00a0top online cat coaching<\/a>\u00a0institute and being a part of the iQuanta CAT 22 Course.![\"\"](\"https:\/\/www.iquanta.in\/blog\/wp-content\/uploads\/2021\/12\/WhatsApp-Image-2021-12-16-at-4.09.20-PM-1.jpeg\")
<\/a><\/p>\n
\nYou can also check out and be a part of their\u00a0Facebook group<\/a>\u00a0for peer learning, doubt solving and free material.<\/p>\n
![\"\"](\"https:\/\/www.iquanta.in\/blog\/wp-content\/uploads\/2021\/02\/WhatsApp-Image-2021-12-14-at-6.21.58-PM-300x57.jpeg\")
<\/a><\/p>\n![\"CAT](\"https:\/\/www.iquanta.in\/blog\/wp-content\/uploads\/2021\/12\/WhatsApp-Image-2021-12-20-at-5.05.31-PM.jpeg\")
<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"