Brokers join hedge funds to fight Reddit Wallstreetbets traders.
The breaking news all over Wall Street is that a group of amateur traders on Reddit have decided to take on the hedge funds. They have caused something called a short squeeze, where they have bought and piled into the stocks that hedge funds want to go down or have shorted.
You can short a stock by borrowing the shares and selling them to someone else with an obligation to buy them back later. If the price decreases, you can buy them back at a lower price and make a profit. If the price increases, you must buy them back at a higher price and you suffer a loss.
This army of Reddit stock market traders calling themselves Wallstreetbets acquired a list of the most shorted stocks by hedge funds and piled in and bought them, sending the price soaring up ‘to the moon’! Their main target was the struggling company GameStop. This caused the hedge funds to lose huge amounts of money and hedge fund Melvin Capital has been completely financially crippled.
It did not last long though, because American broker Robinhood stepped in and decided to prevent retail investors from buying certain stocks. Other brokers in the United States quickly followed suit.
It gets even worse:
The breaking news now is that United Kingdom brokers also appear to be doing the same, preventing their users from buying options on stocks, indices and some futures contracts. One United Kingdom broker going by the name of Trading 212 has completely banned its retail investors from buying options on stocks, indices and some futures contracts.
You can only sell! So, you can make money on the way down, but you’re not allowed to make money on the way up. This is just amateur retail investors though. Hedge funds, they can do what they like.
Unfortunately, a lot of these brokers are funded by hedge funds as their primary investors. We suspect the hedge funds have threatened to pull the funding on them unless they do something about these Reddit Wallstreetbets traders.
Here’s the bottom line:
Brokers preventing certain people from buying certain financial instruments is the most blatant form of market manipulation. We are meant to have free markets, that is how the markets are meant to work. Not where you prevent certain people from doing certain things. Anyone should be able to buy anything that is listed on the exchange providing they have the funds.
Brokers have also prevented retail investors from buying silver contracts. As a retail investor, you cannot buy silver and make money if the price goes up, you can only sell it and make money on the way down. Hedge funds and institutional investors do not have this restriction.
At the end of the day though, these Reddit investors are going to find anything and everything to buy into. So, what are the brokers going to do? Are they just going to ban everything, permanently? We will have to wait and see. We will keep you updated here at LifeLine Media.
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By Richard Ahern – LifeLine Media
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References
1) Short squeeze https://en.wikipedia.org/wiki/Short_squeeze
2) How an Investor Makes Money Short Selling Stocks https://www.investopedia.com/ask/answers/how-does-one-make-money-short-selling/
3) Definition of a Futures Contract https://www.cmegroup.com/education/courses/introduction-to-futures/definition-of-a-futures-contract.html
4) Free market https://www.britannica.com/topic/free-market
5) Silver price hits eight-year high; Robinhood raises another $2.4bn – as it happened https://www.theguardian.com/business/live/2021/feb/01/silver-price-squeeze-reddit-traders-gamestop-ftse-dow-uk-factories-business-live
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