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Shorting stocks doesn't cause businesses to tank. What determines the success of a company like GameStop is whether people go to their stores and spend enough

Shorting stocks doesn't cause businesses to tank. What determines the success of a company like GameStop is whether people go to their stores and spend enough money to cover business expenses. It has nothing to do with the price of the stock.

thebean11 6y ago
That's an oversimplification. A low stock price affects a lot of things, including a company's ability to raise capital.
- popcorncowboy 6y ago
  You're right, but shorts don't _cause_ a stock to be low (in normal/retail circumstances). They're a bet on a stock being overvalued to begin with. - yes, shorting involves selling stock which nominally pushes prices lower, etc etc hat tip illegal S&D
  - thebean11 6y ago
    I kinda disagree, shorting messes with the supply/demand curve by "creating" more shares. If person A has a share, then B borrows it to short and sells it to person C, now both A and C are effectively holding the same share. Put another way, two people have had their demands met by a single share, increasing supply.
    - popcorncowboy 6y ago
      Only if A sells naked shorts, which is illegal. In ordinary circumstances A and C do not and cannot hold the same share. A only holds a claim against B to return the same number of shares as were borrowed.
      - thebean11 6y ago
        No that's not the case. The scenario I described actually happens, and is not naked shorting. That's how GME got >100% short interest. For all you know, you could be the "A" in this situation. Many brokers will lend out your shares, but from your perspective you are just long.
danparsonson 6y ago
The explanation I heard was not that the shorting itself causes the company to tank, but that hedge funds are incentivised to do whatever they can to cause companies to tank once they hold large short positions - via disinformation campaigns, for example. I seem to remember Toys'R'Us suffered a somewhat similar fate not so long ago?
- mobjack 6y ago
  Amazon, Walmart and Target were the ones most responsible for Toys R Us going out of business. They actively ran ads to attract customers away from Toys R Us.
  - forkLding 6y ago
    It depends, the PE firms that bought Toys R Us did what is considered a hostile move in an leveraged buyout (LBO) which is to saddle Toys R Us with lots of debt (aka they raised debt financing to buy the company) so it had to do everything it could to pay the debt and also generate profits for the PE firms and probably not enough to focus on anything else innovation or operation-wise. Its been noted that LBOs have lead to the demise of several famous companies as noted by Investopedia and LBOs has since gained notoriety. See: https://www.barrons.com/articles/private-equity-firms-provide-20-million-in-assistance-for-former-toys-r-us-employees-1542737621 https://www.barrons.com/articles/private-equity-firms-provid... https://www.latimes.com/business/la-fi-toys-r-us-leveraged-buyout-20180316-story.html https://www.latimes.com/business/la-fi-toys-r-us-leveraged-b... https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/ https://www.theatlantic.com/magazine/archive/2018/07/toys-r-... https://www.investopedia.com/terms/l/leveragedbuyout.asp#:~:text=A%20leveraged%20buyout%20(LBO)%20is,assets%20of%20the%20acquiring%20company https://www.investopedia.com/terms/l/leveragedbuyout.asp#:~:....
    - Anon1096 6y ago
      While true that has nothing to do with shorts.
ReaLNero 6y ago
Businesses need credit to get anything done. With a low stock price, businesses need to put larger collateral, which could be more than a bussiness's liquidity. The stock price does matter
clairity 6y ago
whether the markets affect a company's viability depends on their capital structure, of which the public offering is a part, as well as how leveraged the company's various income streams and assets are. it's not as simple as having enough income to cover expenses, although cash flow is a crucial part of the calculus.

thebean11 6y ago

That's an oversimplification. A low stock price affects a lot of things, including a company's ability to raise capital.

popcorncowboy 6y ago
You're right, but shorts don't _cause_ a stock to be low (in normal/retail circumstances). They're a bet on a stock being overvalued to begin with. - yes, shorting involves selling stock which nominally pushes prices lower, etc etc hat tip illegal S&D
- thebean11 6y ago
  I kinda disagree, shorting messes with the supply/demand curve by "creating" more shares. If person A has a share, then B borrows it to short and sells it to person C, now both A and C are effectively holding the same share. Put another way, two people have had their demands met by a single share, increasing supply.
  - popcorncowboy 6y ago
    Only if A sells naked shorts, which is illegal. In ordinary circumstances A and C do not and cannot hold the same share. A only holds a claim against B to return the same number of shares as were borrowed.
    - thebean11 6y ago
      No that's not the case. The scenario I described actually happens, and is not naked shorting. That's how GME got >100% short interest. For all you know, you could be the "A" in this situation. Many brokers will lend out your shares, but from your perspective you are just long.

danparsonson 6y ago

The explanation I heard was not that the shorting itself causes the company to tank, but that hedge funds are incentivised to do whatever they can to cause companies to tank once they hold large short positions - via disinformation campaigns, for example. I seem to remember Toys'R'Us suffered a somewhat similar fate not so long ago?

mobjack 6y ago
Amazon, Walmart and Target were the ones most responsible for Toys R Us going out of business. They actively ran ads to attract customers away from Toys R Us.
- forkLding 6y ago
  It depends, the PE firms that bought Toys R Us did what is considered a hostile move in an leveraged buyout (LBO) which is to saddle Toys R Us with lots of debt (aka they raised debt financing to buy the company) so it had to do everything it could to pay the debt and also generate profits for the PE firms and probably not enough to focus on anything else innovation or operation-wise. Its been noted that LBOs have lead to the demise of several famous companies as noted by Investopedia and LBOs has since gained notoriety. See: https://www.barrons.com/articles/private-equity-firms-provide-20-million-in-assistance-for-former-toys-r-us-employees-1542737621 https://www.barrons.com/articles/private-equity-firms-provid... https://www.latimes.com/business/la-fi-toys-r-us-leveraged-buyout-20180316-story.html https://www.latimes.com/business/la-fi-toys-r-us-leveraged-b... https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/ https://www.theatlantic.com/magazine/archive/2018/07/toys-r-... https://www.investopedia.com/terms/l/leveragedbuyout.asp#:~:text=A%20leveraged%20buyout%20(LBO)%20is,assets%20of%20the%20acquiring%20company https://www.investopedia.com/terms/l/leveragedbuyout.asp#:~:....
  - Anon1096 6y ago
    While true that has nothing to do with shorts.

ReaLNero 6y ago

Businesses need credit to get anything done. With a low stock price, businesses need to put larger collateral, which could be more than a bussiness's liquidity. The stock price does matter

clairity 6y ago

whether the markets affect a company's viability depends on their capital structure, of which the public offering is a part, as well as how leveraged the company's various income streams and assets are. it's not as simple as having enough income to cover expenses, although cash flow is a crucial part of the calculus.