Investing 101

## TL;DR

- Type of security that tracks another asset but can be traded on stock exchanges
- ETFs can contain one asset or thousands of assets from different industries
- Good source of diversification - low risk, lower return
- Thematic ETFS are popular today 

## What is an ETF?

An Exchange Traded Fund (ETF) is a security that tracks another asset (index, commodity, industry) and can be traded on the stock exchange like any public equity. ETFs can track individual commodities (like gold or timber) but also a large collection of securities (space exploration stocks). Since an ETF has more than one underlying asset, it can be a good source of diversification as an ETF can include hundreds to thousands of stocks. As a result, ETFs have lower risk and a lower expected return. 

A well known ETF is the SPDR S&P 500 ETF which tracks the performance of the S&P 500. Not only can an ETF include commodities and stocks, but also bonds, real estate or other investment securities. Its defining factor is that an ETF can easily trade on a stock exchange since it is a marketable security; hence affected by price fluctuations everyday.  

## Thematic ETFs

Today, a lot of the ETFs trading on American stock exchanges are thematic ETFs: focused on a specific industry or trend. As a result, an investor does not need to do any due diligence and is simplifying buying a trend. By buying one share of an ETF, you are taking a stake in all the companies in the fund and gaining exposure to the overall theme. For example, Cathie Wood’s ARK fund released a lot of thematic ETFs based on a trend such as ARKX. ARKX is a thematic ETF focused on growing space exploration companies like Trimble and Lockheed Martin. As an investor, by owning one share of ARKX, you are fractionally exposed to all the companies in the fund. 

## Benefits and Drawbacks 

The benefit of being exposed to so many companies by purchasing 1 share allows investors to face lower average costs, since they only need to execute one transaction to increase/reduce their exposure to so many companies. Compared to individually investing in each company in the ETF, with only one trade, brokerage fees are also fewer. 

However, the above benefit is valid if an ETF is not being as frequently rebalanced. In the case that you invest in actively managed ETFS, fees are much higher as more trades occur. Additionally, if a thematic ETF is focused on one industry like space exploration, diversification is not as great compared to investing in different asset classes. Lastly, liquidity for ETFs are not as high as common stock since they are less frequently traded. 

A security that tracks another asset (index, commodity, industry) and can be traded on the stock exchange like any public equity.

What is an ETF?

Exchange Traded Funds (ETFs)

## TL;DR

- Short sellers are people betting against the stock
- High demand for an asset causes its price to skyrocket for a brief period
- The most famous short squeeze occurred in 2008 with Volkswagen

## What is a short squeeze? 

A short squeeze occurs when a lot of demand for an asset causes the price of the asset to skyrocket for a short period of time. This occurs when a lot of investors bet an asset price will go down but the price actually shoots up, causing all the short sellers (people betting against the asset) to buy back the stock to prevent them from losing more money. The sudden surge of people buying the asset causes a short squeeze to occur, a short period of extremely inflated prices.

An important metric to consider when discussing short squeezes is the short interest ratio. This is the number of days it takes for short sellers (people betting against the stock) to cover their positions (repurchase their borrowed shares). It’s calculated by dividing the number of shares trading short by the average trading volume, over 30 days. This metric measures the number of shares that are short and have not been closed out yet. Usually, a position is closed out once the option is in the money. However, if the option is not the money, then an investor will continue to hold the option. Therefore, a stock with a high short interest ratio could imply a potential squeeze because if the price of the asset keeps rising, this will force short sellers to buy back the stock, raising the price of the asset even more, eventually squeezing to an extremely high number. 

## Example

The most well-known short squeeze in financial history is probably the GameStop squeeze that peaked on January 27th 2021. When a large number of retail traders from a group called WallStreetBets saw how high the short interest ratio for GME was, they decided to buy a ton of shares and hold onto them. By doing this, this was increasing the price of the stock. This became a war between retail and institutional traders, and as more retail traders bought shares and held for dear life, the price continued to rise. On January 20th 2021, GME had reached $40 a share. Almost a week later, GME was trading at $400 a share. The constant purchase of shares by retail traders kept driving up the price of the stock, forcing short sellers (big institutional funds) to buy back shares at higher prices, sending the stock even higher. It is said that institutions like hedge funds and private banks lost upwards of billions of dollars just shorting GME stock. One London hedge fund, White Star Capital, lost so much money going short on GME that it shutdown after amounting losses in the double digits. 

Another very famous short squeeze occurred in 2008 with Volkswagen stock. When short sellers realized that Porsche had bought a major stake in Volkswagen and there would not be enough shares for short sellers to cover their positions, panic occurred. This caused the asset price to rise as high as €999, making Volkswagen one of the largest companies in the world for a short period of time. 

However, once peak asset prices are hit and people sell their shares, more shares become available for short sellers to purchase, causing the price of the asset to return close to its intrinsic value. 

Short Squeeze

TL;DR

What is a short squeeze?

Example

What is an ETF?