Is Bezos going to save the planet?
May 7, 2021 by The Q.ai Team
The educational portion of this newsletter focuses on shorting stocks
In 3:06 seconds, you will learn:
- 5 headlines that pretty much sum up the week
- What’s been going on with COVID-19 vaccines this week
- An introduction to shorting stocks
- Our rec of the week
Five headlines that sum up the week
1. Twitter launches a tip jar for users to pay their favorite Tweeters
Twitter rolled out the ability for users to tip their favorite accounts. This isn’t a new idea. Many users have included their Cash App, Venmo, Patreon, PayPal and Bandcamp links in their bios to make it easy for users to tip them. This feature won’t cut out these payment platforms either – all users need to do is tap the Tip Jar button and select their payment platform of choice. The best part? Twitter takes no cut. Sounds like Jack was annoyed with the cluttered bios and wanted to find a way to clean it up.Read More
2. Peloton recalled all treadmills and delayed release of less expensive model
Peloton CEO John Foley is sorry. After showing reluctance to cooperate with the U.S. Consumer Product Safety Commission, the company decided to recall all of its Tread+ and Tread treadmills and delay the release of the new, less expensive model which was originally scheduled to go on sale May 27. This recall affects around 125,000 treadmills. Stocks declined by 15% – the equivalent to $4.1 billion of its market value.Read More
3. The S&P Dow Jones is adding Bitcoin and Ethereum to its indices
The S&P Digital Market Indices are going to track the performance of cryptocurrencies traded on “recognized open cryptocurrency exchanges” (i.e. Coinbase). This new series of indices include S&P Bitcoin Index, S&P Ethereum Index and S&P Crypto Mega Cap Index. The plan is for these indices to cover over 550 of top-traded cryptos. This is yet another example of cryptocurrencies becoming more widely accepted in the mainstream. Recently, we added Bitcoin and Ethereum into one of our strategies, New Tech Economy, so we can’t disagree with this move.
4. Square’s Q1 revenue increased by 266%, thanks to Cash App and Bitcoin
Square’s first quarter revenue was a total of $5.1 billion, a huge jump from the $1.38 billion in 2020. While Square’s gross revenue was around $964 million, Cash App, a digital wallet that allows users to trade stocks and buy bitcoin, brought in a gross profit of $495 million – a 171% increase from the year before. The biggest driver, however, was bitcoin revenue, which was $3.5 billion.
5. Jeff Bezos sold $2.5 billion in Amazon shares
The richest man in the world sold around 740,000 shares and plans to sell even more in the near future. He still holds more than 10% of the company. He also sold $10 billion in shares last year. What will he do with the money (not that he really needed it)? He’s funding a rocket company called Blue Origin and pledging $10 billion to fight climate change by way of his newly formed “Bezos Earth Fund.”
ICYMI: Pfizer-BioNTech filed for U.S. approval of its COVID vaccine
Today, Pfizer-BioNTech filed for U.S. approval of the COVID-19 vaccine. Currently, the vaccine is approved for emergency use by the F.D.A. Making things official would only add to the legitimacy of the vaccine itself and boost vaccine confidence among those who are skeptical of its safety. If passed, Pfizer would be the first COVID-19 vaccine to receive F.D.A. approval.
Some other stuff went down with Pfizer, as well as Moderna, this week, and depending on whether you’re a human being or a pharmaceutical company, this could be interpreted as wonderful or terrible news.
Yesterday, the World Trade Organization met to discuss potentially waiving intellectual property protections for COVID vaccines. Doing this would give poorer countries access to the patents so that they can develop vaccines more quickly.
Proponents cite concerns that a vaccine-resistant strain could emerge in India, which currently accounts for nearly half of all new COVID-19 cases, and that it could be years before the country is fully vaccinated at the current rate. Critics argue that without the money patents bring in, companies aren’t incentivized to pour resources into vaccine development.
The result of this news has resulted in shares of Moderna, Pfizer and BioNtech – which have been thriving all year – to fall. Of all three companies, Pfizer is in the best shape.
At this time, proponents are in the process of revising their proposal to narrow the focus of the waiver. WTO negotiations require a consensus of all 164 members, so it could be weeks before the organization reaches an agreement.
How to make money shorting stocks
Shorting a company’s stock involves borrowing shares on margin, selling them to another investor, and (hopefully) rebuying them at a lower price. The difference in price is your profit – or your loss. Short selling is risky because it comes with unlimited downside: if the stock price increases, there’s no limit to how much money you could owe your broker. But if you make the right call at the right time, there’s plenty of profit to be had, too.
What does “shorting a company’s stock” mean?
In the simplest possible terms, shorting a company’s stock involves borrowing shares from a broker, selling them to another investor, and (hopefully) rebuying the shares at a lower price to return to your broker.
Let’s give an example.
A stock of your choosing is currently trading for $100 per share – but you suspect that their shares are overpriced. So, you borrow ten shares from your broker and sell them to your best friend – who is stubbornly bullish on this stock – for $1,000.
Thanks to your excellent research and judgment, you happen to time the market just right, and the stock falls the next day to $75 per share. Using the money you got from your best friend, you rebuy all ten shares for $750 and return them to your broker – and pocket the $250 difference.
Of course, your best friend is now annoyed that you made a better investment call, but what can you do?
The downsides of short selling
If the stock’s price increases, there’s no limit to how much money you could potentially owe your broker to cover your borrowed shares.
Shorting stocks requires a method of investing known as margin trading, which allows you to borrow money with your investment serving as collateral. Margin trading can be expensive, and there are rules you have to follow.
For instance, federal regulations require a minimum maintenance balance of 25%. If you slip below this line, the broker may put in a margin call and require you to front more cash or sell your position. And in the meantime, the broker may earn interest on your margin account or demand commissions on your trade, thereby eating into your profits.
So, why do people short a company’s stock?
While short selling can be risky, there are some circumstances under which shorting a company’s stock may make sense.
- If you’re convinced a company is about to take a short-term drop, you may decide to make money on a company’s misfortune for your own gain – even if the company is otherwise a solid investment
- Shorting can provide a way to diversify your investment exposure and boost your returns
- Stock returns are limited by a company’s stock growth, shorting returns give you a chance to profit off their losses
- Investors use short selling as a way to hedge against the downside risk of a long position in the same or related securities
How to make money shorting stocks
The first, of course, is to borrow shares from a broker, sell, and hope that the company slips up. However, since this method comes with unlimited downside risk, it’s typically not recommended for the average investor. Here are some other ways:
- Investing in Inverse Funds – these ETFs and mutual funds are pegged to an index, such as the S&P 500. But they only profit when the underlying index declines – and when the market goes up, they lose value.
- Shorting Exchange-Traded Funds – you can also short sell an ETF instead of a specific stock. This strategy involves taking the short position on an ETF indexed to the S&P 500. In other words, you’re betting that the entire market will fall, not just one stock or industry.
- Taking the Put Option – alternatively, you may decide to minimize your risk – particularly your downside exposure – by buying a put option on a stock. This gives you the right, but not the obligation, to sell a position at a predetermined price (strike price) before your options contract expires.
The bottom line
Regardless of which method you’re comfortable with, stock shorting isn’t an investment strategy for everyone. There’s no guarantee that you’ll make the right call, on the right company, at the right time. Not to mention, the potential downsides are endless – while your upside is capped at a stock dropping to $0.
Visit our Learning Center for the full “Investing Explained” resource
What is a Special Purpose Acquisition Company – or SPAC? This video from CNBC explains why this asset class is fast becoming a favorite among various types of investors.