Can you please truly explain like I’m five? Like with bubblegum or cookies as an example? Because I have tried understanding how this works several times and I just do not get it.
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A new Star Wars movie is coming out. Episode XXV: R2 becomes a Jedi. You know a guy who bought 5,000 toys for Episode XXV, and they’re all new, mint in box. He keeps them in his (crammed full) garage, and he thinks they’ll be worth a buttload of money someday.
You think Episode XXV is going to flop, and flop hard. You go to this guy and ask to borrow those toys. “I’ll return them in six months, exactly as they are. If any are not brand new, mint in box, I’ll replace them with the exact same figure that will be brand new, mint in box.” This guy says okay. But you have to pay him $10,000 to borrow them.
Each of those Episode XXV toys sells for $20 right now. That guy you know paid $20 apiece for them. You think that six months from now, after the movie flops, those things will sell for $2 apiece in the bargain bin. Your friend thinks they will sell out and people will buy them for $100 each on eBay. Your plan is to sell all those toys now, at $20 each, and buy replacements in six months when the price has crashed.
Nobody knows who is right ahead of time. If you are right, then you got $100,000 from selling toys, and you paid $20,000 to buy them back, plus $10,000 for a borrower’s fee. You just made $70,000 profit with very little effort and zero cash up front. And while your friend lost a bunch of money on it, that was his own investment he already made. At least he got a $10,000 fee from you so he didn’t lose quite as much money.
If your friend is right, and the movie is amazing, then you might have to spend a huge amount of money buying all those toys on eBay six months from now. Maybe the R2 with a lightsaber figure is going for $800, and your friend had two thousand of them. There’s really no limit to the amount of money you might lose on this. If things go badly for you.
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