Unless you don't care about Wall Street at all, you have probably heard about Wall Street Bets and the crazy CRAZY happenings on Wall Street the last week or so.
(source - stolen from theycallmedan)
Who Is Wall Street Bets?
Wall Street Bets is a group of individual investors who have taken on an aggressive short squeeze approach to investing. They have banded together on Reddit and other social media platforms to target specific stocks that have extreme short exposure.
What is a Short Squeeze?
With margin accounts, you can sell a stock you don't actually own. This is called shorting a stock. Basically, you are taking out a loan for the value of the stock (and paying interest by the way). But the tricky part is that your loan is for the current value of the stock not what it was worth when you shorted it.
If a stock you are shorting increases in value, your loan value increases, and you start owing more and more. Eventually you either need to buy the stock back at a loss and/or add funds to your account to cover your margin. As more and more investors get margin calls on the stock it creates a feed back loop that puts more and more upward pressure on the price. A "short squeeze" happens when the number of people having to cover starts driving the cost of dramatically.
Heavily shorted stocks are more susceptible. Wall Street Bets appear to be targeting stocks with heavy institutional short positions and very low stock prices. These nearly-bankrupt companies have very little going for them long term but in the short term Wall Street Bets is taking advantage of the over-leveraged positions the shorters have taken.
Is what Wall Street Bets doing illegal?
I'm no lawyer but it does seem like it is a form of organized market manipulation that is generally frowned on. Again, I'm not a lawyer so really, I don't know. Is it ethical?
Is it successful?
Holy Cow! They are producing some eye popping results - even in comparison to some of the spikes we have seen in the crypto market. 200%, 400%, even 800% gains in a week!
Who Gains From This?
The main people to gain in a pump and dump are always the people organizing the pump. They work behind the scenes slowly buying the stock or crypto while it is still not in the spot light. Once they have their own stake in hand they start spreading the news to all the "members" in the pump who then also start buying and spreading "Good news" about the target stock on social media. This increase in buying starts driving the price up which triggers a short squeeze.
Who Gets Hurt
Ultimately what Wall Street Bets is doing is a well organized "pump and dump." It isn't new, especially in the crypto world, and there are certainly losers.
The biggest losers are the people who had been shorting the stock as they get caught up in a situation where they have to cover their short. If they can't afford to add more money to cover their margin they need to buy back the stock at a significant loss.
The news is making it out that the big time institutions are getting hurt by Wall Street Bets. I tend to doubt that, as most of the big boys can wait out a short squeeze. Particularly when it is a pump and dump like Wall Street Bets is doing.
The ones I feel for the most are some of the people I have read comments from who don't seem to realize it is all a pump and dump and who get pulled in late in the game. They are likely buying in mid-pump or later and once the pump is over and the price crashes back down, they will be left holding a stock that they may have to sell at a loss or worse yet hold into bankruptcy.
After all, the stocks being targeted are all stocks that are in serious trouble. GameStop is a good example. Brick and Mortar shops all in high rent strip malls can not compete with Amazon and other internet sellers. I would not be wanting to hold their stocks long term.
How To Protect Yourself And Profit From A Pump and Dump
There are a lot of Pump and Dump groups out there if this is something you would want to get involved in. Just remember, the organizers are going to be the ones who really profit as they have already amassed their shares before they announce the pump. But that doesn't mean you can't benefit from their efforts.
Another way to spot a pump and dump before it goes mainstream is to watch the volume of some of the dog stocks or crypto. The organizers will be slowly buying up shares for weeks before the pump. A potential sign a pump is coming is when you see a steady increase in volume with out a corresponding increase in price.
A few things to keep in mind -
- The pump up can be fairly short. Maybe a few days or even a few hours.
- Pick a reasonable profit target and sell before the dump really kicks in.
- The dumps happen fast faster than the pumps
- True "pump and dumps" have nothing behind them - if you get caught on the dump side Cut your loses, or take your profits, do not hold thinking it will rebound.
Be Safe Out There
Remember, it is a dog-eat-dog world out there in stock and crypto trading. There are a few old sayings that you should always keep in mind as you are trading.
- Don't be greedy - Pigs get fed but Hogs get slaughtered
- Don't get conned - Every con has a mark, if you don't know who it is, it is probably you.
- Don't trust other peoples advice. Do your own due diligence.
As always, this is just my opinion, and isn't intended to be financial advice.
Good luck to all traders!
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