The stock market has been a hot topic of discussion lately. It has been in the news, on social media, and even the popular app Tik Tok has had several viral videos about it. Many of the headlines refer to Gamestop, hedge funds, and short selling. These topics can be a bit confusing, so here are some definitions to help understand the current situation.
Terms and definitions
Mutual funds - Mutual funds consist of a group of people pooling money together in an investment package of stocks, bonds, and other assets. Mutual funds have to register with the Securities and Exchange Commission (SEC). Once registered, they are able to market themselves to the public to solicit investing.
Hedge funds - Hedge funds are similar to mutual funds, but they are not regulated to the same extent by the SEC. Because of this, they cannot market themselves and cannot take money from the public. For this reason, you must be an accredited investor in order to invest money with a hedge fund. According to Khan Academy, an accredited investor must meet specific net worth requirements or earn above a certain income threshold. They also receive a larger percent of the profits.
Short selling - Short selling is when an investor borrows stock that they believe will decrease in value. They will then sell these borrowed stocks to other buyers at the market price. They are essentially betting that the stock price will go down over time so they can buy shares at a lower price in the future to cover their initial borrowing. Profits arise from the difference between the initial market price and the discounted value they are able to get in the future.
Short squeeze – Short sellers eventually have to buy back shares to cover their initial borrowing. A short squeeze occurs when the value of a stock that has been shorted increases in value instead of falling. As short sellers buy back the shares to cover their initial borrowing, this can further increase the value of the stock because of higher demand. This makes it even more expensive for the short seller to cover their debt and results in financial losses.
Piecing it together
Now that we’ve covered some of the terms being mentioned in the news, hopefully it will be easier to put the pieces of the story together. The stock market changes daily, so keeping up on new terms is a great way to start getting yourself ready for investing.
Khan Academy www.khanacademy.org