TL;DR — DJT Stock is so crappy that the demand for short sales has ballooned the price to short it beyond anything normal. In other words, seasoned investors think DJT is going to fail badly enough to accept extraordinary fees to profit off the failure.
* if you are not sure what short selling is all about I give a quick explanation a little further below so don’t run away! *
You can read about this here at CNBC or on other financial sites. What has happened with Trump’s disaster of a stock is an unprecedented cost in order to short sell the stock:
“Investors who wanted to borrow Trump Media shares to sell them short on Wednesday would have had to pay annual financing costs of between 750% and 900% of the price of the stock, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.”
[bolding mine]
In comparison to what is typical linked here at Seeking Alpha (a financial education site):
“The cost of borrowing a stock to short can vary but typically ranges from 0.3% to 3% per year. The fees are applied daily. The borrowing fee can be much higher than 3%, and can even exceed 100% in extraordinary cases”
[bolding mine]
As you can see this situation with DJT is extremely unusual. The high water mark listed at Seeking Alpha is “exceeding 100% in extraordinay cases” so what does that make this? Pretty much earth-shatteringly abnormal in this case.
Before going further I will try to explain this complicated topic as best as I can. It can be very confusing. I also want to say that there are compiclating factors to this particular happening but none of them can remove the basic fact that:
A lot of people smart enough to know how to short sell stocks are betting that this thing sucks badly enough to take this risk.
Quick Explanation of short selling: You’ve probably heard of “Short Selling” a stock. It’s a way to make money when the price of a stock goes down.
The way it works is that you borrow shares of stock from a pool of willing borrowers and then you sell those shares with the hope of then buying them back at a lower price and returning them to the entity that lent them to you.
If at the point you saw DJT at $79 and thought it would likely drop, you enter your stock broker application and ask for a “short position”. At this point you are connected seemlessly with a shareholder who is willing to lend the stock to you. Eventually you have to return it to them. They charge you a fee to borrow the stock to do this, so, take a normal case.
If you borrowed a typical $78 stock for a year you would have to pay them $2.34 in year at 3%.
With a stock of DJT when it was $78 you would have need to pay them back $624.
Ok, so what does this mean you are probably asking?
Well, it’s really about supply and demand and in the case of DJT the supply is more complicated than typical which is part of why this is happening. Full disclosure — For various reasons even if it were a good stock, there are less available stock shares to borrow than is typically the case due to the fact the Trump’s shares are locked and he can’t lend them, that said;
The fee percentage increases when there is less supply of available shares to borrow. It’s a market based commodity. The fewer shares that exist to borrow the more the borrowers can charge. In the case of DJT there aren’t enough shares to match the demand and this has driven the cost of borrowing up.
The natural reaction to this is that demand for the shorts should decrease. If it looks like it’s going to cost you a lot of money even if the stock price does go down, you are no longer interested in shorting.
That’s not happpening. There are still plenty of people willing to take this incredibly expensive short position because they believe it will fail so badly that it will outweigh the costs. The folllowing quote is from the same CNBC article
“Despite that and despite Trump Media’s high cost to sell short, plenty of investors are interested in doing just that.
They are drawn by the fact that the share price gives it a market capitalization of $6.6 billion despite having just $4.1 million in revenue last year.
“What I’m hearing on the Street is that if [an amount] of stock becomes available, shorts are taking it down,” Dusaniwsky said.
Final takeaway? Regardless of reasons for lack of supply of borrowable support the bottom line is: