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Infinity Pool Concept & Security Backed Lines of Credit
It's important to note that this is not financial advice. Investing in the stock market carries risks, and individual decisions should be made based on thorough research and professional guidance. Consulting with a financial advisor is always recommended to understand the complexities and risks involved. This information is intended to provide a better grasp of potential scenarios and to help investors ask informed questions when discussing strategies with their financial advisors.
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Please remember that each investor's situation is unique, and decisions should be tailored to individual circumstances and risk tolerance. Always seek professional advice before making any investment decisions.
What is the "infinity pool"?
The "Infinity Pool" is a concept discussed within the r/Superstonk subreddit, focusing on the ownership of GameStop shares. It involves shareholders transferring their GameStop shares to "book form" through the Direct Registration System (DRS), effectively removing these shares from market circulation and preventing them from being lent out for short selling. This strategy aims to create a scarcity of available shares, potentially triggering a supply squeeze. Institutions holding short positions would then be forced to buy back shares to close their positions and avoid infinite losses. The r/Superstonk community of individual investors believes that the true short position, exacerbated by manipulative techniques such as 'naked shorting,' could be higher than 200% of GameStop's available floating shares. If successful, this could lead to a dramatic price surge, theoretically resulting in an "infinite" increase, hence the term "Infinity Pool." This movement towards DRS is a broader effort by individual retail investors to challenge and expose perceived market manipulation by large financial institutions.
How could the price possibly go up infinitely?
Don't understand Direct Registration System (DRS) means?
Naked shorts? Naked shares? Learn more about market manipulation here!
Curious about the wild world of short squeezes? Let's dive into the history of these dramatic market maneuvers, complete with thrilling real-life examples! Discover legendary market battles and the stories behind these financial phenomena. Ready to explore some of the most jaw-dropping short squeezes in history?
Ever wondered if GameStop's meteoric rise in January 2021 was truly a short squeeze? Despite the mainstream media and financial institutions labelling it as such, many individual investors in the r/Superstonk community argue otherwise, dubbing it a mere "sneeze" since the majority of short positions reportedly remained open. Intrigued? Let's unravel why this epic market event might not be the classic short squeeze everyone thinks it is. Dive into the controversy, the media narratives, and understand the financial fraud committed to hide these ridiculously large short positions.
The main reason is "naked shares". Picture hedge funds holding billions in short positions. As the price climbs, their losses escalate, putting immense pressure on their balance sheets. To counteract this, they engage in a practice called naked shorting, where they sell shares that don't actually exist. This influx of 'phantom' shares into the market creates the illusion of increased supply, causing the price to drop.
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However, these naked short sales have a ripple effect. Another institution might borrow these non-existent shares, often at the highest price of the day, and profit from the difference as the price falls. But here's the catch: the reason these hedge funds can't simply close their positions and cut their losses is because there are no real shares left in the open market to buy back.
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In essence, they are stuck in a loop. Every attempt to drive the price down through naked shorting only postpones the inevitable margin calls. It's like trying to keep a sinking ship afloat by bailing water with a bucket full of holes. The longer this continues, the more dramatic the potential price surge becomes, as the demand for these scarce shares skyrockets, leading to an explosive upward pressure on the stock price. This dynamic creates a perfect storm where hedge funds are desperately trying to avoid a financial meltdown, while individual retail investors and other market participants watch the unfolding drama with bated breath.
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Now understand that the market is filled with too many fake shares, borrowed as short positions. If the stock price keeps rising, short hedge funds will be forced to close their positions. They'll have no choice but to buy back real shares, driving the price even higher.
This situation can start with just one hedge fund. The collective GameStop short position is held by many institutions. If one hedge fund decides to cut its losses and close its short position at the current market price to avoid margin calls and bankruptcy, it will do so. Wall Street operates on a survival-of-the-fittest mentality. They'll sacrifice their peers to live another day. In this scenario, if you're not first to close your position, you're last.
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When the first hedge fund closes its short position, the price will surge. This will trigger a chain reaction, forcing other hedge funds to cover their positions at even higher prices. This cycle will continue, driving the price up until one fund is left unable to cover its position, leading to bankruptcy.
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This creates a high-pressure situation where hedge funds must act quickly to avoid, what can quite literately turn into infinite losses. The market dynamics ensure that the first to cover their positions will mitigate their losses, while those who delay will face escalating financial damage. Now this is where the fun part begins...
Wouldn't Gamestop's shareholders sell their shares if it went up that much, causing the price to go back down?
Yes, it's likely that some GameStop shareholders would sell their shares if the price soared dramatically. However, the key difference between sales during a short squeeze and sales in a typical market is significant.
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When shorts are closing, hedge funds suffering substantial losses will buy back any available shares to reduce their losses on paper. It's important to remember that there aren't enough real shares in existence to cover all short positions. This short squeeze will continue until all short positions are fully closed.
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At astronomical prices—four, five, even six figures per share—many shareholders might sell only a few shares and keep the rest tucked away. These sold shares will be quickly bought up by hedge funds that haven't yet closed their positions, driving the price even higher.
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Additionally, some individual GameStop investors won't sell any shares, no matter the price. A few have even suggested using Securities-Based Lines of Credit (SBLOCs), which allows them to access funds without selling their shares, thus avoiding capital gains taxes. This steadfast refusal to sell by a portion of shareholders, combined with the continued buying pressure from hedge funds closing their short positions, will sustain and potentially escalate the price surge until the short positions are completely depleted.
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NOTE: If you hold stocks in a brokerage account and haven't transferred your shares through the Direct Registration System (DRS), be aware that your broker can legally close out your positions to protect themselves in high volatile situations. By law, unless your shares are registered in your name via DRS, your broker is permitted to sell your stocks to cover their interests. Knowing this can help you make informed decisions about your investments.
Hold up! You can access funds without selling shares & avoid capital gains taxes?
Absolutely, using Security-Backed Lines of Credit (SBLOCs) is a primary method that wealthy individuals leverage to fund real estate investments, business ventures, and other opportunities without needing to sell off their existing investment holdings. This allows them to continue growing their portfolio over time.
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One significant advantage of SBLOCs is the ability to avoid capital gains taxes entirely. In some countries, capital gains taxes can be as high as 50%, which can be a substantial sum on a gain of even just 1 million dollars. With SBLOCs, individuals can access funds without triggering these taxes, as they only need to pay the interest on the loan.
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SBLOCs essentially enable people to sustainably fund their lifestyles while keeping their investments intact and growing. It's a strategy that provides flexibility and liquidity without the drawbacks of selling investments.
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If you're interested in learning more about SBLOCs and the brokerage firms that offer them, you can find more information below.
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It's important to note that this is not financial advice. These financial tools carry risks, and individual decisions should be made based on thorough research and professional guidance. Consulting with a financial advisor is always recommended to understand the complexities and risks involved. This information is intended to provide a better grasp of potential scenarios and to help investors ask informed questions when discussing strategies with their financial advisors.
Security Backed Line of Credit
A Security-Backed Line of Credit (SBLOC) is like having a home equity line of credit (HELOC) but for your investment portfolio. It gives you the ability to borrow money using your stocks or mutual funds as collateral. This type of loan provides quick access to cash with low interest rates, making it a much cheaper option than using a credit card.
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When you use an SBLOC, you typically make interest-only payments each month until you pay off what you borrowed. It's important to note that these loans are "non-purpose," meaning you can't use the funds to buy more stocks, but they can be used for other needs without restrictions.
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Some brokerages, like Schwab, refer to SBLOCs as "pledged asset lines."
This is different from a "margin account" or a "margin loan," which are specifically designed to buy more stocks.
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In summary, an SBLOC offers flexibility and liquidity, allowing you to leverage your investments without the pressure of buying more securities. It's a valuable tool for managing your finances and responding to unexpected expenses or opportunities.
