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  • The Truth About Wall street Bets

  • It seems like we have developed a tradition where  every year starts with a financial disaster.  

  • 2020 started with a massive stock market crash.  2021 with retail investors pushing hedge funds  

  • to lose billions of dollars and  putting the entire financial system  

  • upside down. I am just curious  what 2022 is holding for us

  • The fed is going to announce that it's  going to launch its own crypto currency?  

  • I wouldn't be surprised.

  • GameStop's stock price surged more than 1,700%  instantly, driven by a group of amateur investors  

  • on Reddit who organized a revolt against  hedge funds that bet against the company.  

  • The best part is that these hedge funds that  seemed like no one can beat them at their game  

  • lost billions of dollars. A bunch of  Reddit users destroyed multi-billion  

  • dollar hedge funds that spend millions on  the latest softwares, best accountants,  

  • and analysts to predict the market. They even  caught the eye of the White House in the process.

  • Melvin Capital, one of the hedge funds that  shorted GameStop, lost 53%. It started the  

  • year with 12.5 billion dollars and ended  January with just 8 billion dollars.  

  • It's estimated that short-sellers lost nearly  $13 billion on GameStop alone so far this year.  

  • I guess these hedge funds will think  twice before shorting another stock.

  • However, most retail investors who purchased  the stock at 300 or 400 dollars or above  

  • ended up losing most of their money since  platforms like Robinhood restricted trading.

  • To understand what really happened with GameStop,  

  • we have to understand why hedge funds  shorted game stop in the first place?  

  • How is it possible to short more stocks than the  number of stocks that exist? Should you trust  

  • WallStreetBets? and how to avoid the biggest  financial mistake that most investors make?

  • We will answer all of these questions and many  more, but before we do that, here is a little  

  • disclaimer - this is not financial advice, and  everything that's said in this video is for  

  • educational purposes. In order to make the best  financial decision that suits your own needs,  

  • you must conduct your own research and seek  the advice of a licensed financial advisor

  • And now, give this video a thumbs up for the  youtube algorithm, and let's get right into it.

  • 
 1. shorting - a tool for the Ultra-Rich

  • You probably heard about hedge fundsbut you don't know for sure what they do  

  • because they are not allowed to market  themselves since they are not regulated.  

  • That's why very few people know how hedge work.  

  • Hedge funds are made by the rich for the  rich to make rich people richer and avoid  

  • taxes - that's all that you need to know. If you  have never invested through a hedge fund before,  

  • that's alright because you need a net worth  of a least a few hundred million dollars.  

  • Unlike ETFs, they take a percentage  of the profit besides a percentage  

  • of the total assets you invest in. That's why  they try to maximize profits for their clients.

  • The most common investing strategy you probably  heard is - buy low and sell high. That's how you  

  • and I invest, but the ultra-rich like hedge  funds invest by reversing this strategy.  

  • They buy high and sell low. That doesn't  make sense at first glance, but it's simple.

  • Let's say you expect a certain stock to  decline like Intel because you know that  

  • Apple who is their biggest client, will announce  next week that they will no longer buy Intel chips  

  • and make their chips in-house. So you  pick up your phone and call your broker.  

  • You borrow from him a single intel stock that  costs 100 dollars and instantly sell it in the  

  • open market for 100 dollarsCongrats!  

  • Now you have 100 dollars in your pocket, but  you still owe your broker one intel stock.

  • Let's say you are right, and Next  week intel's stock price drops to  

  • 70 dollars. You use that 100 dollars to buy  one intel stock for 70 dollars since the  

  • price dropped and return it to your  broker and pocket the difference

  • Congrats! You have made 30  dollars out of a fall of stock!

  • It sounds simple in theory, but it's  extremely difficult and risky in practice

  • What happens if you are wrong? What  if the price doubles overnight?  

  • You still have to return that  single intel stock to your broker?  

  • Now you have to buy that stock back for  200 dollars to return it to your broker.

  • When you buy a stock and try  to sell it when it rises,  

  • the maximum that you can lose is the amount you  invested in, but not in the case of shorting.  

  • If the price keeps rising, your losses  keep rising. Theoretically, you can make  

  • unlimited losses since, theoreticallythe stock price can rise indefinitely

  • So when hedge funds realized  that GameStop is struggling,  

  • they decided to play around with its stock and  bet against it, and shorted 114% of its stock.  

  • What? Wait a second!

  • How can you short more stocks than  the number of stocks that exist

  • It's complicated, but here  is the simplified version.

  • Let's say Elon owns 1 GameStop stock. His  broker lends his (Elon's) one share to a  

  • short seller Jeff. Jeff borrows that stock  and sells it in the open market to Warren.  

  • Warren doesn't know that Jeff actually borrowed  that stock, so Warren's broker lends his share  

  • to another short-seller Bill who then goes  and sells that share to another investor. The  

  • exact same share now has been shorted twice. This  scenario shouldn't have happened, but it happens

  • So the Reddit user who was investing in  GameStop since the fall of 2020 realized that  

  • all of these hedge funds shorted  over 100% of GameStop shares,  

  • which means if everyone starts buying GameStopthe sock will keep rising, and hedge funds  

  • will have to buy these shares no matter how  expensive they get to exist their position.

  • But that will drive the price higher, which  will attract more investors, which will again  

  • drive the price higher to the point where  these hedge funds will either go bankrupt  

  • or at least buy back these shares at an  unbelievably high price. So GameStop's  

  • stock price surged more than 1,700% instantly. Theoretically, it made sense to buy GameStop  

  • because short-sellers had to pay  interest on the borrowed stocks.  

  • If everyone held their position and didn't sellhedge funds would have kept proposing higher and  

  • higher price. Gamestop could have easily crossed  a thousand dollars, but something went wrong.  

  • Platforms such as Robinhood and others restricted  retail investors from buying more GameStop shares.

  • That's insane!

  • Of course, they explained their actions by  saying that they were protecting their clients,  

  • but I don't personally buy thatThat could be the reason partly,  

  • but I think there is a lot more to this than we  know. Who knows, maybe one day we will find out

  • Trading - another form of gambling

  • Here is what I don't like about these  kinds of investments. First of all,  

  • it's not investing - it's trading. And  it's not based on any data or logic.  

  • The people who invested in GameStop and similar  companies are not investing because they did  

  • not do fundamental analysis and expect the  business to grow, it was pure Pump and dump.

  • The problem with that is that, no matter how high  the stock price will rise, it will crash and fall  

  • back to where it started because the company  didn't change or grow. At some point when the  

  • price reaches a certain point, early buyers  will sell which will drive the price down,  

  • which will force other investors to panic and  sell which will further drive the price down,  

  • which will force more investors to panic and  sell and so on until most people who purchased  

  • the stock after the hype will lose at  least some of their money if not all.

  • You could be lucky, you could be one of the  early buyers, but chances that you will lose  

  • money especially if you invested once it was  already all over the news are way higher.

  • When something like that happenswhen everyone is making money,  

  • when it's all over the news, it's  really difficult to control yourself.  

  • The feeling of missing out will push you to invest  even if its too late. I have had that feeling  

  • multiple times, but I try my best to control  myself because if I feel like I am missing out,  

  • chances that I have missed out are already 90  percent. So even if it's a great opportunity,  

  • I would rather miss it than lose the money  I have earned with my blood and sweat.

  • I am not saying you shouldn't take risks  or invest. Investing is great. I do invest  

  • myself. This channel is about investing. But when  investing is based on facts and data, Chances  

  • you will make money are way higher and most  importantly, you can sleep peacefully at night

  • If you have enjoyed this video, you will most  definitely enjoy this custom playlist that I  

  • have created specifically for you that  has our most popular videos on business,  

  • investing, and the stock market that  can potentially change your life

  • And now give this video the thumbs  up that it deserves and make sure to  

  • subscribe if you haven't done that yet. Thanks for watching and until next.

The Truth About Wall street Bets

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Do NOT Make This Investing Mistake - The Truth About WallStreetBets

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    Summer posted on 2021/03/06
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