Several Wall Street firms faced the prospect of massive losses this week as a result of their short positions in several stocks, most notably in GameStop Corporation. Individual investors, encouraged most notably by users on the Reddit forum, or subreddit, WallStreetBets, purchased shares in GameStop and other stocks facing short positions to punish those shorting the stock as well as provide a boost to those companies.
Short selling occurs when an investor borrows a stock from another investor or brokerage, usually for a fee, and sells it immediately after. The investor expects the stock to decrease in price, and the investor hopes to repurchase the stock and return it to the original holder. The profit to the investor is the sale price minus the repurchase price minus the borrowing fee. However, if the stock increases in value, the investor will have to repurchase the stock at a greater price than which he sold it, and the losses can be theoretically unlimited.
Several brokerages, including Robinhood, blocked purchases on Thursday for WallStreetBets’ favored stocks, prompting criticism from investors as well as government officials.
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