Short Selling of Game Stop

 Games People Play 

Oh we make one another cry        
Break a heart then we say goodbye         
Cross our hearts and we hope to die
That the other was to blame whoa   

So who won, who lost, and who was to blame in the Game Stop situation

Game Stop was involved in a short selling situation in recent days.  So what happened, who won, who lost, and who is to blame.  Short selling sounds like a complicated financial arrangement, but it is basically simple.  Let's replace the share of stock with a coat that you purchased for $100 at a store.  A short seller borrows it from you, and says he will return it after a month,  He immediately goes to the store, returns the coat, and pockets the $100.  He hopes that the coat will go on sale during the month, say for $60, and he will purchase the coat at that reduced price.  At the end of the month, you have your coat back, the store has received $60 in revenue from the coat instead of $100, and the short seller has a $40 profit.  This requires that no one, except the short seller, knows that he plans to the return of the coat, and that the store put the coats on sale. 

If someone gets wind of this need, and the price of the coat is reduced to $80 after halfway through the month, then a second owner buys the coat at $80, and lists that coat for resale at $120. The short seller will have to buy that coat at $120 to be able  to return the coat that he borrowed.  In this case, the original owner of the coat still has his coat, the short seller’s loss is $20 for his repurchase of the coat, the store has received $80 for the coat, which is a loss of only $20 in sales, and the second owner  has received a $40 profit for the resale of the coat.  The total value over all individuals is still the same, but the store is $20 richer, and second owner of the coat has a $40 profit, and the short seller has a $20 loss instead of a $40 profit.  It is hard to see how society has a dog in this fight since the net cost is still zero.   The store experiences a $40 loss of revenue in the first case, and a $20 loss in the second case.  The short seller experiences a $40 profit in the first case, and a $20 loss in the second case.  The second owner is not involved in the first case, but has a $40 profit in the second case, by reducing the store's loss of revenue by $20 and taking $20 from the original short seller.  Does it surprise anyone that many of these second owners purchased their stock (coats) through an app called Robinhood?

The situation could not have existed if the knowledge that the short seller would need a stock (a coat) was known only to the short seller.  Since the knowledge that the short seller would need the stock (a coat) became known, then the new owner of the stock (a coat) has profited,  the original owner ( the store) has less of a loss, and the short seller has a loss, instead of a profit. The game has changed from the original short seller profiting to the short seller having a loss.