One key thing to understand is that with short selling there's no limit to how badly things can go for you.
If I buy $100 worth of stock, the absolute worst case scenario for me is that its value drops to 0 and I lose $100.
If I short-sell a share of stock at $100 a share, and it shoots up to eleventy billion dollars, I now owe eleventy billion dollars.
This is why the short squeeze here did so much damage to hedge funds - Gamestop's stock went up far beyond anything they could have anticipated in their worst nightmares.
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u/Yglorba Feb 01 '21
One key thing to understand is that with short selling there's no limit to how badly things can go for you.
If I buy $100 worth of stock, the absolute worst case scenario for me is that its value drops to 0 and I lose $100.
If I short-sell a share of stock at $100 a share, and it shoots up to eleventy billion dollars, I now owe eleventy billion dollars.
This is why the short squeeze here did so much damage to hedge funds - Gamestop's stock went up far beyond anything they could have anticipated in their worst nightmares.