The Trump Media anti-short selling campaign may have inadvertently played into the hands of short sellers. After short sellers covered their shorts by buying shares in the $20s, they have been patiently waiting for false claims of victory. And it seems that time has come, with the short sellers making their move once again.
The campaign by Trump Media to malign short sellers publicly and urge Nasdaq and Congress to take action seemed to have had some initial success. The stock quickly rose from the low $20s to around $50, giving the appearance of a victory. However, both long buyers and short sellers play a crucial role in ensuring proper pricing in the market. Blaming short sellers for the downfall of a fundamentally weak stock is futile. They act as a check on overoptimism and overvaluations, providing a necessary reality check for Wall Street and the capital markets.
But did the actions of Trump Media drive off the short sellers? Not exactly. Short sellers were aware of what was coming and took their gains by covering their shorts. However, they have not disappeared completely. Short sellers will likely return because the Trump Media stock remains overpriced.
In addition to these factors, Trump Media now faces a combination of other risks that increase the likelihood of a further plunge. First, the fundamentals of the stock are significantly weak, providing only minimal support for the stock price. Second, the recent increase in common shares by 50% has diluted the price per share support. Third, the registration for “resale” of the enormous 204 million shares that have been issued is pending. Once approved by the SEC, this will lead to a major increase in the number of shares available and attract a new set of investors. Finally, it is important to note that many shareholders obtained their shares through convertible debt. These forced conversions into common stock at the time of the merger have created a unique shareholder base.
Given these factors, it is evident that Trump Media Stock is at a high risk of experiencing a new short selling plunge. Investors and market participants should closely monitor the developments and consider the potential consequences for their portfolios.
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