Here's the gist, in simplified terms. I assume you understand what stock and stock brokers are...

You can 'short' a stock that you think is going to lose value (e.g. you expect a major earnings miss to be reported).

Shorting a stock means you borrow a share from (generally) your broker at todays price. You then sell that share to someone else for market price. At a determined date, you have to buy another share at market rate and give it back to your broker (this is called 'covering' your short).

If you bet right, you borrowed a share, and sold it for $N. Then, at a future date, when the price fell, you bought for $N-X, and gave the share back to your broker. You just made $X, the price difference from the value of the stock falling.

If you bet incorrectly, you borrowed a share, and sold it for $N. Then, at the future date, the price is actually higher, and you have to buy a share at $N+X, AND give the share back to your broker. You just lost $X, the price difference from the value of the stock rising.

If you bet REALLY wrong, the $+X factor can get really high - your broker may 'call' and force you to give them cash, pending your future purchase of the share to return (your 'cover').

Now, to MOST people, shares are effectively unlimited - with tens of millions or more shares on the market for most traded firms, liquidity isn't an issue. If you want a share or a few shares in a company, it's pretty easy to get them. What may or may not be happening here, is that a TON of folks are currently 'short' on Tesla's stock, meaning millions of folks are going to HAVE to buy shares of the stock to 'return to their broker' and cover their short. The problem is that Tesla DIDNT go down.

Normally, lots of folks are short on lots of stocks, and the market just moves. Occasionally, you get a confluence of events which leads to there being a high demand for a stock that a large number of shares are shorted on, which has a self-feeding pain cycle: the stock price is based mostly on demand and liquidity - as more and more folks HAVE to buy the shares to cover their shorts, the demand for the stock is going to go up, and thus the price is going to go up as well. This increase in price increases the pain, and triggers many brokers to 'call' those margins, requiring MORE people to buy the stock to cover, driving the demand up even higher. The end result is a big spike in the price of the stock, and a TON of people losing money on their bad bets.

Thanks, I think I get it now. :)

Great explanation, thank you!

>There's probably some interesting commentary in there somewhere about the complexity of financial markets and how it is probably bad for society to have a vast portion of our economic growth riding on something most people don't get.

Not really. Financial markets day-to-day operations don't really affect peoples real-lives. Every industry is full of terminology and jargon that describes the inner workings but that isn't necessary to understand for the outsider.

The average person with a retirement fund just wants to see it keep and increase in value over time. They don't particularly care if the traders of that fund were losers/beneficiaries of a short squeeze on a segment of their portfolio, as long as the overall value keeps going up.

Kind of like how the average web visitor doesn't care what OS and database a site runs as long as it is fast and bug-free.

I'd be happy to try to explain anything. This doesn't even get into the little "unhedged" word's complexity :)

That's when you start getting into options and derivatives, which are (theoretically) priced on a 5 variable differential equation called "Black-Scholes" (intuitively, you are just buying the right to buy or sell a stock for a particular amount at or by a certain date in the future).

You could construct a trade using those where you would make a smaller amount of money if the price fell, but your losses would be capped above a certain amount. In investing terms, you could buy out of the money calls to hedge your short position, and then your loss would be capped at (price you sold - max(price you have to re-buy at, price you can call your options at plus the option premium). I'll stop there before I get too far out of my league :)

It's more jargon than it is complexity.

Most people don't get electricity or internal combustion engines or computers or whatever, so that is kind of a scary standard.