(ConservativeHub.com) – Theories abound regarding the best way to turn a quick profit on the stock market. One of them involves shorting stocks. Short-selling, as the practice is known, involves borrowing shares of a company and selling them immediately. The hope is that sell-offs will decrease the stock’s value so the borrower can repurchase them at that lower price, return them to the lender, and keep the difference.
Unlike traditional stock purchases, the potential losses in short-selling are exponential. If an individual purchases shares of a company, the worst thing that typically happens is the investor loses the stock’s purchase price.
But when short-selling, a company’s stock can theoretically keep rising to the point an individual might lose multiple times their investment. For example, if an individual borrows stock shares and sells them for $5 and the price rises to $20, the borrower loses $15 repurchasing them so they can return them to the lender.
That scenario appears to be playing out with video game retailer GameStop’s stock. Its shares rested at about $18 on January 8 but doubled within 4 days. It kept rising, and the week of January 24, it doubled twice before backing down a bit on January 28. The stock has increased by a total of around 1000% in 2021.
Robinhood Puts on the Breaks
Online stock trading company Robinhood Markets, Inc. restricted its users from trading shorted stocks, including GameStop shares, on January 27, deeming them volatile. In response, retail investor Brendon Nelson filed a class-action lawsuit against Robinhood in the Southern District of New York.
The lawsuit alleges Robinhood “knowingly” removed GameStop shares from its trading platform during an unprecedented rise in its stock value. It claims that action deprived investors of the ability to profit from the stock’s rise in value on the open market.
Legislators ranging from Sen. Ted Cruz (R-TX) to Rep. Alexandria Ocasio-Cortez (D-NY) blasted Robinhood for its decision to interfere in stock trading. Robinhood’s future remains uncertain at this point, but both Cruz and Ocasio-Cortez agree that congressional hearings on the matter are warranted.
This story is breaking, and we’ll keep you updated as events unfold.
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