That whole GME thing is not stupid... institutions are holding 106% of GME stocks... not sure how much non-institutions are holding. What is stupid is what the government is allowing institutions to do.
Holding 106% can be perfectly rational, it happens just because shorts create a loan.
Suppose we have a company and an institution has analyzed the books and knows is worth $10/share, shares are currently trading at $5. Suppose this is an unusually small company and there are only 100 shares outstanding total. Institution buys them all up since it's such a good deal.
Along comes Citadel who decides the company is going bankrupt and decides to sell the company short. Borrows 50 shares from the institution's broker and puts them up on the market. Now the institution sees that 50 more shares are available again at $5. Still the institution knows they are worth $10/share.. it's completely rational to purchase those shares and increase the holding to 150 shares even if the official shares outstanding is only 100 shares. Institution can sell all 150 for $10 a share assuming they are eventually right about the validation and Citadel will be the one that needs to make up the difference.
aeternum|5 years ago
Suppose we have a company and an institution has analyzed the books and knows is worth $10/share, shares are currently trading at $5. Suppose this is an unusually small company and there are only 100 shares outstanding total. Institution buys them all up since it's such a good deal.
Along comes Citadel who decides the company is going bankrupt and decides to sell the company short. Borrows 50 shares from the institution's broker and puts them up on the market. Now the institution sees that 50 more shares are available again at $5. Still the institution knows they are worth $10/share.. it's completely rational to purchase those shares and increase the holding to 150 shares even if the official shares outstanding is only 100 shares. Institution can sell all 150 for $10 a share assuming they are eventually right about the validation and Citadel will be the one that needs to make up the difference.
Triv888|5 years ago