Risk management should consider market structureĪ simple rule for risk management is that you never want an investment that can get you carried out on your shield even if you feel 100 per cent convinced you are right. Without risk, however, there can be no return.Ģ. The former, greed, cannot be regulated away. The solution is education for the latter. People who speculate might not want to "miss out," and they often do things they do not understand. We will justify all of this with a rational explanation but always after the fact. Read Edward Chancellor's excellent book Devil Take the Hindmost: A History of Financial Speculation, and you soon see market anomalies have been around since ancient Rome. However, investors may be concerned or appalled by this, but they should not necessarily be "surprised." History is replete with countless stories of bubbles, crashes, and anomalies. The efficient market hypothesis melts in extreme cases. Emboldened by their success, a growing number of homebound day traders have jumped on the bandwagon.Ĭrude oil prices can go negative, and stocks that are going out of business can rally 1000 per cent.
The result was an epic rally in heavily shorted companies and enormous volatility. Redditors and WallStreetBets readers coordinated a full-on assault against Wall Street and various hedge funds in an "anarcho-capitalist" push by heavily buying stock and out of the money calls to force short sellers to cover. Theoretically, shorting a stock leaves you potentially exposed to an infinite loss as stocks can only go down to zero but can go up for ever. A short squeeze is when there is a rush to buy back heavily shorted shares to "cover" this position. Shorting a stock is when you borrow shares and sell them on the open market in the hopes to rebuy them at a lower price. In short (sorry about the pun), GameStop and a handful of heavily shorted stocks succumbed to what is known as a short squeeze. I cannot help but ramble out a few points to consider. A lot has been written on this saga, and there is much to learn from this. I started writing about taxes and new government initiatives in Bermuda, but something distracted me in the markets … GameStop (Ticker: GME). At one point the fintech company Robinhood restricted trading in the stock, and a few others, on its consumer retailer app (File photograph) Making headlines: a flurry of trading in GameStop send the stock soaring last week.
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