The stock market is often referred to as a battle between bulls and bears. Bears often try to suppress the market to make huge profits but at times they dig their own grave while doing this. Lets read a few such stories.
What is short selling?
Short selling is a finance practice in which an investor, known as the short-seller, borrows shares and immediately sells them, hoping to buy them back later at a lower price, return the borrowed shares (plus interest) to the lender, and profit off the difference. The practice carries an unlimited risk of losses because there is no inherent limit to how high a stock's price can rise.
What is a short squeeze?
A short squeeze is a term used by market participants to refer to a phenomenon where short-sellers in a stock who have placed their bets on a stock’s fall, rush to hedge their positions or buy the stock in the event of an adverse price movement, to cover their losses.
A short squeeze has been practiced on many stocks right from the establishment of the stock market. Here are some stocks which were squeezed overtime:
GAMESTOP- It is an American video game retailer. In January 2021 Citron Research predicted that the value of the stock will fall significantly. By Jan 21 around 140% of the company’s public float was sold short. Responding to this, members of “Wall-Streeters”, an online community on Reddit starting pushing up the stock. At its height, on January 28, the short squeeze caused the retailer's stock price to reach a pre-market value of over USD 500 per share, nearly 30 times the $17.25 valuation at the beginning of the month. It is very difficult to predict the reason for the squeeze, but the possible reason can be gambling to earn money quickly or rage towards the hedge funds. Elon Musk also tweeted ‘Gamestonk’ along with the link of Wall-Streeters after realizing the bullish trend in the stock. By Jan 28, Melvin Capital, an investment fund that heavily shorted GameStop, had lost 30 percent of its value since the start of 2021. Andrew Left, Head of Citron Research, had also shorted the stock and claimed to have closed the position as a total loss. However, later on, this stock was barred from trading.
RELIANCE INDUSTRIES- In the mid-1980s, Dhirubhai Ambani crushed the bear cartel, led by Manu Manek who started short selling Reliance stock. Manu Manek thought that the business magnate would surrender before the bear cartel. However, Anand Jain and his associates came in Reliance defence and bought every share the bear cartel sold. In those days’ settlement used to take place once in fortnight period. Anand Jain constantly provided stock to Reliance stock price and it started increasing again. The bears owned no stock and were under constant pressure to deliver the shares. They had no other option than to buy the stock at a higher price. Eventually, the bears lost the battle. This marked the triumph of Dhirubhai Ambani over Dalal street.
TESLA- Tesla Inc. short-sellers bore a loss of around $40 billion as the stock price surged 740% in 2020. This is based on data collated by Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, a financial analysis company. Dusaniwsky told Institutional Investor that shorting Tesla is “by far the longest unprofitable short I’ve ever seen." Tesla's fight with short sellers continues to be unbeatable. But still, the rally in Tesla stocks continues to be low because of the large volume of buying in-out options, which are low premium dealings.
HERBAL LIFE- Bill Ackman shorted 1 billion worth shares claiming that the company’s working was a fraudulent pyramid scheme. His claim was initially accepted by Federal Trade Commission. Later on, billionaire Carl Icahn came in rescue of Herbal Life. After a long battle, Icahn won and Ackman lost around 1 billion as the share price surged.
VOLKSWAGEN- In 2008, The stock price surged making it the largest company in the world. The reason for the push was the Porsche announcement regarding its stake buy in VW. Hedge Funds found a golden opportunity and Porsche didn’t announce that it will continue buying a stake in VW. It had cornered the majority of the float, leaving only 6% in free float. Short sales, meanwhile, had risen to 12% of total outstanding stock. Logically, It became very difficult for the bears to source shares. The share price reached all-time 999 Euro. Porsche managed to burn many short-sellers, it couldn’t pay up for the large positions it had created, and ended up being acquired by VW instead.
-BY SUSHANT & ASEESPREET
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