What is Short Selling? This Analogy Explains Why GameStop Stock is Hurting Hedge Funds

A screenshot explainer is helping rookies get their heads around the concept of shortselling, after the GameStop affair brought the concept to public attention.

Shortselling is the practice of borrowing a stock in order to sell it on, in the belief its price will drop, allowing the seller to repurchase it at a reduced price later on and return it to the lender, while keeping the profit.

The practice is covered in detail in the 2015 film The Big Short, which explains the subprime mortgage crisis that led to the 2008 economic crash.

However, with the share price of video game retailer GameStop going up 8,000 percent in six months as a group of DIY investors worked to protect their position in the company, and push out hedgefunders working to short the stock, the concept is back in the public domain—and an explainer is needed.

Which is where Twitter user SteveyJ comes in. Replying to podcaster Darius Soriano's request for a simple explanation of the Gamestop story, SteveyJ posted a screenshot explainer, complete with ape, snake and banana emojis to explain what's been going on.

Titled "Let's dumb this down for you apes," the screengrabbed note breaks the Gamestop saga down into a series of simple steps. SteveyJ explains in his accompanying tweet that in the analogy "the regular people are the apes and the hedge fund people are the snakes."

The graphic reads: "Let's say 5 banana's currently cost $10. One ape on the market has 5 banana's.nake asks to borrow 5 banana's for a bit and instead sells the 5 banana's thinking price will go down soon (shorting). He thinks he can buy them later for less and give them back to ape, so he make's profit on the difference.

"Group of apes notice what stupid snakes are doing and decide to buy all banana's on the market until snakes have no other choice than to buy from the group of apes in order to return what they borrowed. If group of apes stay strong then price will go UP."

The regular people are the apes and the hedge fund people are the snakes in the analogy pic.twitter.com/Fpcu18Myl9

— SteveyJ (@ImSteveyJ) January 27, 2021

The group of individual GameStop investors have posed a serious challenge to well-known hedge funds such as Melvin Capital, costing them a reported $23.6 billion this last month alone.

The investors have used the Reddit board r/wallstreetbets to organise themselves. Going by the nickname WSB, the board describes itself as "Like 4chan found a Bloomberg Terminal," in reference to the fringe message board and the widely used trading software.

The unprecedented GameStop saga began last September, after investor Ryan Cohen took a 13 percent position in the video game retailer, and began lobbying for it to move its sales online in a bid to rival Amazon.

A number of individual investors, often using apps such as Robinhood, followed Cohen's example and invested in shares in GameStop.

However, large hedge funds saw the endeavour to challenge Amazon as doomed, and began buying up stock in order to short GameStop—drawing the lines for a battle between the individual investors and professional financiers that has since caught the public's imagination.

While the above analogy may provide clarification for some newcomers, one respondent points out that it doesn't fully explain the situation.

"This is good but also imagine there were only 15 bananas in the world and the snakes had sold 21 at $10 by reborrowing them," said Abhay Vamarajha, further complicating the matter.

Customers at a Hollywood, California GameStop branch
GameStop in Hollywood busy with customers waiting in line to enter the video game retailer on January 27, 2021. The videogame retailer is at the center of an unprecedented standoff between individual investors and hedge funds working to short-sell the company's shares. AaronP/Getty