So with this whole GameStop issue going on right now one of the common themes I've seen being espoused is that the amateur traders are morally right and the hedge funds who shorted are morally evil, the argument goes that by heavily shorting GameStop stocks the people who are short are actively driving the company to failure and bankruptcy.

So can heavily shorting a company cause it to fail?

As far as I'm concerned the share price is a totally arbitrary number which a lot of the time doesn't really add up to how successful a company is, I guess that shorting a company can drop it's stock price which can cause some investors to cash out and others to decide to not invest (but vice versa it could cause other investors to believe the stock is undervalued and should be bought), but I doubt it could ever snowball to cause a company to fail solely because it got shorted


2 Answers 2


Nope, not per definition.

You have a company. It makes a profit. The lower the stock price goes, the - well - more interesting it is for investing.

Gamestop? That company is not failing due to the shorts - people are short because the company is failing. It is not a growing profitable business, technically it is an outdated business model with a shrinking market.

As per yahoo finance (https://finance.yahoo.com/quote/GME/financials?p=GME) it has a loss every year for quite some time. The hedge funds went short because they considered the price too high for a business that is likely going into bankruptcy at some point.

QUITE obviously (and without the talk whether short is moral or not) they seriously overdid id and quite a lot of people did not do any risk assessment on having such a brutal short exposure.

So, the market teaches them a lesson - but the core point that this company will not survive without some serious change in direction is irrelevant to this market issue. High price or not, Gamestop has some serious issues and is a failing company from it's balance sheet, not the shorters.


Not necessarily, A stock is share in the company, and its value for the investor is based on its expected future profit. Gamestop has been in decline for years, a not uncommon retail trend in the face of online retail (think about how easy its been to bet against retail in a pandemic). Ideally a stocks value "prices in" all available information and the companies fundamentals (its debt-to-equity, growth, potential etc) - but stocks have been up all last year partly because of exogenous forces (the fed pumping money, the CARES act giving cash to unemployed, in poverty ie consumers).

Since a short is a bet that the stock will decline in value, it's based on the expectation that the company's future stock price will be lower. If the market sentiment becomes very strong, it might scare away investors and many companies perform stock buybacks in part so that they have holdings to liquidate to pay debtors in leaner times.

But what if you made a bad short and you're a major financial player? Well it would be illegal to just spread bad rumours to tank the shares and make bank off your short. That's called market distortion and its illegal because it can impact the future of a company especially if takes off, and professionals are expected not to make risky decisions that can harm the stability of the broader market.

But retail investors on a forum are not considered an institution. There's no formal co-ordination like at a Hedge Fund and unless Melvin Capital made an incredibly risky bet there's no problem. There's no code of conduct or test before amateurs trade in these risky markets - apps trading options to amateurs is unregulated.

The people calling now for regulation are facing a new type of coalition that could imperil a whole way of doing finance. They want rules that protect professionals but bind amateurs, and not rules that bind professionals and protect amateurs.

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