What is an assets?

There are three types:

  • Intangible assets, which are not physical(i.e. trademarks, copyrights, ect.)
  • Financial assets, which are liquid property(i.e. stocks, bonds, bank deposits,ect.)
  • Real assets, which are physical property(i.e. barrels of oil or acres of forest land)

When you buy a stock, you are buying equity (a financial asset) in a company.

There's two main kinds of stock:

  • Common Stock a stock that guarantee certain voting right on the company's board. There are three types of common stock: A class, B class, C class * Note that A class has the most voting power and C class has the least power
  • Preferred Stock , a stock that has usually no voting rights. However, preferred stock entitles the owner to a share of revenue in the form of a dividend. Also, preferred stock holders are first to the trough when ever the company's assets must be liquidated

What are options contracts? An options contract offers the buyer the opportunity to buy or sell depending on the type of contract they hold the underlying asset.

Types of option contracts:

  • Call options contracts allow the holder to buy the asset at a stated price within a specific time frame. (Ex. I think prices on GME will go up, so I go to a broker and ask for an options contract to buy GME at the current price. If the price goes up, I be able to exercise my option (i.e. buy GME) at the price stated in the option contract )

  • Put options allow the holder to sell the asset at a stated price within a specific time-frame. (This is just a reverse of call options. Except, you are able to sell instead of buying)

Remember options give you the option to ** exercise your contract, but does not a require you to exercise** your contract

What is short selling?

Short selling is a trading strategy where a seller will borrow shares from his or her brokerage company and sell the shares on the open market. The seller believes that the stock price will drop below the current prices. If this is the case, the seller will be able to buy back the shares for lower price at a later date. In this way, the short seller is able to pocket the difference. However, the short sell Must Exercise his contract by buy back the stock at any price at a certain date.

  • To short sell, a seller must maintain a margins account (a account with a certain amount of money in reserve as collateral) as often time the strategy fails and the seller is on the hook for a large loss.

What is a Short Squeeze?

A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses. Remember, the short sellers must "cover" or by back the stock share by a certain date. If Melvin Capital tries exit it's short position all a once, the firm's rapid buying to the stock will drive up the price causing a short squeeze.

Second Addition

What is a brokerage company?

A brokerage company acts as a middle-man between the buyer and seller of a asset or security. Brokerage companies were traditional staffed by brokers that bought and sold financial assets on the floor of a stock exchange. They typically would make money from a commission of each trade. In the past 10 years, this practice has faded as computerized order matching systems have automated the brokers jobs.

  • Companies like Robinhood don't charge commissions because they "allegely" loaning money in investor accounts or simply selling investor data to high-frequency traders to make money.

Side Note, Commissions use to be insanely expensive, like $20 or even $50 dollars per trade. A losing proposition for any retail investor.

What is a Hedge Fund?

To understand an hedge fund, we need understand a hedging strategy, which is to take a investment position while simultaneously also taking the opposite of that investment position. For example, you could hedge your investment in GME by buying a GME put contract(i.e. the option to sell at a certain price). By doing this, you ensure that your investment is protected from a large drop in value.

  • In short, hedging can protect you company or investment from the volatility of the market (measure by the VIX index)

Hedge Funds, like Melvin Capital, take hedging to the extreme. In fact, many hedge funds don't exactly hedge, but just take very risky trading strategies or investments in real assets (i.e acres of forest land). Only very wealth individuals and institution can invest in hedge funds, due to their risk, these funds are typically require investor to park their money for a long period of time. However, these funds can provide massive returns so it's often a risk worth taking.

Side Note, many large companies conduct hedging strategies to protect their investments in commodities need for manufacturing or service. Think Airlines hedging oil prices to ensure that they don't need to raise seat prices to cover the costs of a sudden spike in oil.

I hope this post was informative. Financial activity affects almost every aspect of our daily lives and is critical to sustain modern enterprises, so it's important people understand what going on. * Though finance should be conducted for the benefit of society rather than personal gain * Also, fun fact, the Soviet Union practiced a form of state finance, albeit without trading.

Edit: put contracts should be selling instead of buying