For retirement investors of GameStop (GME) and other meme-type stocks looking to learn how they can direct register their shares, you will want to read this article. This article will explain the concept of direct stock registration, its benefits, and the impact it can have on the future price of GME and other types of stocks.
- GameStop was big news in 2021 thanks to Reddit investors
- Direct registering your stocks can save you from a short sale
- Using a Self-Directed IRA LLC to direct register your stocks also comes with tax advantages
The GME Story
With the emergence of online gaming and cloud servers, the idea of a brick-and-mortar business selling games seemed like a thing of the past for some investors. The seeming certainty of GameStop’s demise made it an clear target for short sellers.
Things started heating up between short sellers and individual investors in GME stock in January 2021.
A tug-of-war between everyday investors and hedge funds heated up and support grew for GameStop on reddit/wallstreetbets. On January 22, 2021, the stock skyrocketed more than 50%. During after-hours and pre-market trading that weekend, the GME continued to climb. On Jan. 25, it opened at $96.73. On January 26, 2021: ‘GameStonk’ gets celeb backing from Elon Musk. Shares soared by nearly 140% in after-hours trading. The stock opened on Jan. 27 at a whopping $354.83 a share. On January 27, 2021, major short seller hedge funds close their GME stock positions at a significant loss.
On January 28, popular trading platforms, such as Robinhood and TD Ameritrade, restricted transactions that involved the stock. Robinhood stated “the decision was made based on clearinghouse-mandated deposit requirements.”
What happened was a crazy day of trading, which saw the stock rise to around $483, before settling in at $112 by the time the markets closed.
Why did GME stock go up so much?
Much of the surge in GME share price seems to be at the hands of short sellers who were covering short positions by buying back GME shares. Shorting a stock is often riskier than owning one. When you own a stock, the maximum amount you can possibly lose is whatever amount you’ve invested—if you buy $100 worth of Apple, and Apple crashes to $0, you’re out $100. But with short selling, your maximum loss is hypothetically limitless, as there’s no cap on a company’s value. If you short Apple at $100, and Apple announce they have a cure for cancer, causing Apple’s stock to hit $2,000, you would be out $1900. Yikes!
How Does Short Selling Work?
Below are four steps that best explain how short selling works.
- Borrow shares from a broker who is willing to lend them for a fee.
- Shares are then sold on the open market.
- The shares are then bought back after the stock goes down in price.
- The shares are then delivered back to the lender who keep the price difference.
In practice, short sellers are supposed to borrow shares from real investors. The interesting fact is that in many cases, the real owner of the shares is not even aware that the shares they own have been lent out by the brokerage firm used by the investor. The brokerage firm is more than happy to offer up the investors’ shares to short sellers. Stock lending fees are a significant source of broker revenue
The GME Short Squeeze
Short sellers have ways to defend against a surging stock they have taken a short position in. For instance, if a company stock being shorted suddenly jumps in value, they can buy the shares back at a slightly higher price rather than risk a bigger loss. For example, if you short Apple at $100 and it climbs to $150, you may decide to eat the $50 loss rather than chance an even worse outcome.
But when a huge number of people are shorting a particular stock that suddenly skyrockets, it can trigger a “short squeeze,” where short sellers hurry to buy up more shares to give back to their lenders. That drives up demand and reduces supply, further increasing the price and thus getting even more short sellers to buy, and so on. It’s a brutal cycle that can annihilate short sellers, but benefit investors who owned the stock before the squeeze.
How Are Stocks Titled for Ownership Purposes?
Before computers, stock ownership was reflected in paper certificates which were mailed to the investor. The share certificate contained the actual name of the owner. Today, book entries are used in place of paper certificates. Initially, several institutions were tasked with handling the book entries and clearing of trades. However, over the last twenty or so years, one single private organization has taken over complete control over the handling and registration of shares. The organization is known as the DTCC (Depository Trust and Clearing Corporation).
Under the DTCC, when an investor uses a broker to buy stock, the DTCC’s subsidiary, the DTC (Cede & Co.), is the name that is entered on the “books” at a transfer agent, such as Computershare, for every single existing share. The investor is only the “beneficial owner” on your broker’s books, but the broker is the “beneficial owner” on the DTCC’s books. The DTCC is the primary owner, while the broker is the secondary owner, and the investor is a third-level owner on the share that the investor actually bought and paid for.
In essence, the only way for an average investor to be the primary owner of any shares of stock they purchase is to direct register that stock with the transfer agent for the company. Direct registration of stock puts the investor on the same level of ownership as the DTCC.
Why Direct Register a Stock?
At its core, the main reason why one would want to direct register their GME or other stock they own is to prevent an ongoing market manipulation and price suppression of that stock. This is what was believed to have occurred with GME stock. Whether it was through naked short selling or other means, the ability of short sellers to acquire GME shares to cover their short positions was highly controversial, to say the least. It was reported that GME investors called their brokers in droves requesting that their shares be barred from being lent out. Nevertheless, brokers continued offering GME stock for lending purposes.
The direct registration process allows any company that issues stock to use a third-party company to maintain a stockholder record of exactly which investors own each single share that exists. It can be compared to a digital stock certification. GameStop uses Computershare as their third-party company or “transfer agent.”
For GME and other company shares, the idea is that if more shares became direct registered, fewer shares would be available to short sellers. If short selling increases artificial share supply into the marketplace, direct registration of shares reduces real supply available for shorting.
How to Direct Register GME Stock in Your Self-Directed IRA
Of course, one can own stock, such as GME, personally or in a retirement account, such as an IRA. The advantage of owning stock in an IRA is that all gains will go back to the IRA without tax; this is known as tax-deferral.
IRA Financial Trust is a regulated state charted trust company authorized to administer and custody retirement accounts. IRA Financial is not a brokerage firm and does not sell equities or provide investment advice. IRA Financial is solely responsible for the administration of IRA and other retirement accounts.
Below are the steps involved for direct registering your GME stock in a Self-Directed IRA:
- Open a Self-Directed IRA account with IRA Financial.
- Request an in-kind indirect rollover of the GME stock from their current custodian (brokerage firm). The brokerage firm will DRS (Direct Registration System) the shares into Computershare in the name of the individual IRA owner. The shares will go from the brokerage firm into the name of the IRA owner and then into the name of the IRA (IRA Financial Trust Company FBO John Doe IRA). IRA Financial, we will need a copy of this statement as well as a completed Deposit form, which you can complete on our app. The process will need to be completed within 60 days. Note – one can only do one indirect rollover every twelve months.
- IRA Financial will establish a limited liability company (LLC) that will ultimately be owned by your IRA. The LLC can use any available name. The ultimate title to the GME stock will be in the name of the LLC, which will be 100% owned by the IRA and managed by the IRA owner (you). This is known as a Self-Directed IRA LLC. The IRA owner will serve as the manager of the LLC giving the IRA owner complete control over the LLC. IRA Financial will simply be the custodian of the IRA and will have no authority over the GME stock as the LLC operating agreement provides that the LLC is controlled by the LLC manager (the IRA owner). Since a single member LLC is treated as a disregarded entity for tax purposes, no federal income tax return is required.
- The ownership of the GME stock will then be changed from the IRA owner’s name to the name of the LLC. This must be done within 60 days of having the GME shares titled in the name of the individual IRA owner. The GME stock will be re-titled from the name of the IRA owner to the name of the IRA and then to the name of the LLC.
- The GME shares will be directly registered in the name of the LLC. You, as manager of the LLC, will have complete control over the LLC.
IRA Financial will offer retirement investors of GME stock with a discounted flat low annual fee for establishing a Self-Directed IRA LLC for the direct registration of the GME stock.
Please contact a Self-Directed IRA expert for more information at 800-472-0646.