Speculative Trading Is Only One Reason Why Market Volatility Is High01/29/2021


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U.S. equities continued their roller-coaster ride today on concerns around speculative trading by retail investors. Recently, the stock market has been led by stocks with the highest percentage of short interests, or investors betting against them. As a reminder, short selling is when an investor borrows shares and immediately sells them hoping to buy them back later at a lower price. If an investor can borrow and sell a stock at a cheaper price than they bought it, they can profit. The fear for financial markets is that if the heavily shorted companies continue to rise in such a volatile fashion, it causes a short squeeze forcing hedge funds and other investors who bet against these companies to sell other securities to raise cash for margin requirements needed to borrow stocks. A short squeeze happens when a group of investors, looking to cover their short positions, start buying at the same time. This has been the primary driver in the performance of these stocks which have large short interests. These forced sales by hedge funds, combined with fears this speculative mania may be an indication of a larger market bubble that it is unraveling, could also cause significant market turbulence.

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Commentaries are published by Cetera Investment Management LLC, an SEC registered adviser owned by Cetera Financial Group. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers.

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