I understand that it means betting against a company’s future prosperity in value.
But why is that a thing?
How does it actually work?
Who are you buying from/selling to, when you practice this?
Sounds more similar to gambling than to constructive investment.
🙏
In: 9
All investment is gambling. No exceptions.
To short a stock, you make an agreement with someone that you WILL sell them some stock at the market price, and then buy it back from them after a bit, also at market price.
They are betting the stock price will go up, and then you will still have to buy it from them, but at a higher price than they paid you.
You are betting it will go down, meaning you can buy it back for cheeper than you sold it.
Its high risk though, because if the stock goes up 1000%, you have to pay out at 1000%, but if the value of the stock drops to 0% you pocket the whole initial purchase. so the amount you can loose is unbounded, buy not the amount you can gain.
All investment is gambling. No exceptions.
To short a stock, you make an agreement with someone that you WILL sell them some stock at the market price, and then buy it back from them after a bit, also at market price.
They are betting the stock price will go up, and then you will still have to buy it from them, but at a higher price than they paid you.
You are betting it will go down, meaning you can buy it back for cheeper than you sold it.
Its high risk though, because if the stock goes up 1000%, you have to pay out at 1000%, but if the value of the stock drops to 0% you pocket the whole initial purchase. so the amount you can loose is unbounded, buy not the amount you can gain.
It doesn’t literally mean betting against as in gambling. You don’t do this on a betting platform, but through a broker one.
In ELI5 terms, you borrow someone’s stock and promise to give it back at a certain date in the future. You borrow it to sell it for what is worth now, hoping that it will be worth less in the future when you buy another to give it back. Not always this will be the case, the price might also increase, meaning you will pay more than you got for it, thus being at a loss.
Yes, it feels like you are betting against the company, but it can also be that you feel it is overpriced right now. It doesn’t mean it will perform worse in the future, but maybe its price will converge to its real value.
Why would someone lend their stocks for this purpose? Well, shorting it isn’t free. You pay a premium and it is usually done in batches. Like you need to short 100 units and you pay 2 usd for each.
It doesn’t literally mean betting against as in gambling. You don’t do this on a betting platform, but through a broker one.
In ELI5 terms, you borrow someone’s stock and promise to give it back at a certain date in the future. You borrow it to sell it for what is worth now, hoping that it will be worth less in the future when you buy another to give it back. Not always this will be the case, the price might also increase, meaning you will pay more than you got for it, thus being at a loss.
Yes, it feels like you are betting against the company, but it can also be that you feel it is overpriced right now. It doesn’t mean it will perform worse in the future, but maybe its price will converge to its real value.
Why would someone lend their stocks for this purpose? Well, shorting it isn’t free. You pay a premium and it is usually done in batches. Like you need to short 100 units and you pay 2 usd for each.
You give your friend 10 usd to borrow his bike and you agree to give it back in a month.
You then show “your” new bike to your friends and one of them offers to buy it for 100 usd. You know black Friday is coming before you need to return the bike and you know you can get it cheaper there so you sell it. Black Friday comes around and you buy the bike for 80 dollars and then return it to your friend. Congratulations, you made 10 dollars shorting.
Aside from consent issues in the example, it’s the same for stocks. You borrow someone else’s stock, you sell those stocks and hope they will be valued less when it’s time to return them because you need to buy same number of stocks back.
You give your friend 10 usd to borrow his bike and you agree to give it back in a month.
You then show “your” new bike to your friends and one of them offers to buy it for 100 usd. You know black Friday is coming before you need to return the bike and you know you can get it cheaper there so you sell it. Black Friday comes around and you buy the bike for 80 dollars and then return it to your friend. Congratulations, you made 10 dollars shorting.
Aside from consent issues in the example, it’s the same for stocks. You borrow someone else’s stock, you sell those stocks and hope they will be valued less when it’s time to return them because you need to buy same number of stocks back.
You pay someone a fee to borrow x shares.
If you are shorting then you sell the shares now and then rebuy the shares later hoping prices will fall.
If you succeed then you pocket the difference and return the shares back to their original owner.
If you fail then you lose money buying the shares back at a higher price and return them back to the original owner.
The original owner doesn’t care either way as long as they get all their shares back and they get the fee money on top of that “for free”.
You pay someone a fee to borrow x shares.
If you are shorting then you sell the shares now and then rebuy the shares later hoping prices will fall.
If you succeed then you pocket the difference and return the shares back to their original owner.
If you fail then you lose money buying the shares back at a higher price and return them back to the original owner.
The original owner doesn’t care either way as long as they get all their shares back and they get the fee money on top of that “for free”.
To short a stock, you borrow shares from other investors at your brokerage sort of like how a car loan from your bank is funded from deposits of other bank customers.
You then sell the borrowed shares, pocketing the proceeds. You owe the brokerage a return of the shares, and you’re hoping that down the road the stock price will fall and you can buy shares to return at a lower price. If you shorted at $100 and stock falls to $75, you could then return the shares and make $25 per share in net profit.
To short a stock, you borrow shares from other investors at your brokerage sort of like how a car loan from your bank is funded from deposits of other bank customers.
You then sell the borrowed shares, pocketing the proceeds. You owe the brokerage a return of the shares, and you’re hoping that down the road the stock price will fall and you can buy shares to return at a lower price. If you shorted at $100 and stock falls to $75, you could then return the shares and make $25 per share in net profit.
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