How many suckers in the house? Short sellers sell stocks short based on the assumption that there are enough suckers who would be forced to sell at very low prices when it is time for the short sellers to start covering. They keep pushing the price down until they break your resolve and force you to surrender/capitulate.
What happens when strong hands meet weak hands :
“Imagine” a market where there is one strong hand representing smart money (a bank, hedge fund, market maker, big investor…) and 2000 weak hands representing dumb money (retail investors, grannies in retirement, kids new to investment…). The strong hand knows the game of shorting stocks and has been playing it for decades fleecing the weak hands while laughing all the way to the bank so they play their chips this way:
- They dump a large order on the market by selling 5 million shares short for $6 a share
- A few weeks later they sell short another 3 million shares for $5 a share
- A few weeks later they sell short 1 million shares for $4 a share
- A few weeks later they sell short 500,000 shares for $3 a share
- A few weeks later they sell short 300,000 shares for $2 a share
- A few weeks later they sell short 200,000 shares for $1 a share
At the end of this special operation (bear raid) spanning between a few months to a few years the strong hand would have sold short a total of 10 million shares for $51,300,000 at an average price of $5.13 per share bought by some 2000 retail investors who are faced with two choices : - 1- Sell at the current price of $1 per share to the strong hand who started it all and allow him to cover his short position for a total profit of around $41,000,000 (after fees, interest and commissions…) or
- 2- Get smarter and stronger and keep holding until the A.H is forced to cover for $10 per share.
- Your decision.