It’s not totally clear to me of what this is or how this works. And how to profit in the markets.
In: Economics
If you think a stock undervalued and set to rise in price then you buy it and gain as the value increases. Easy.
If you think a stock is overvalued then you need to get creative. The first response – buying options – works. You can also “borrow” shares. Someone who owns the stock and is confident in its value will lend you their shares of that stock for a set period of time and you immediately sell those shares to a 3rd party (e.g. “borrow” at $40 and immediately sell at $40). If you are right, then the price of the stock will drop and when the term of the loan is up you can go buy those shares at the new, lower price and repay the original lender.
Let’s say that $40 stock has dropped to $20, so if you borrowed and sold 100 shares you were paid $4,000 for them. When you bought them back to repay the loan you paid $2,000 leaving you a net profit of $2,000.
The risk is that your losses are potentially infinite which your gains are restricted to the difference between the original stock price and ~$0.00. (If you borrow at $40 the stock might go to $100 so you lose $60 for every share you borrowed, OTOH you cannot possibly make more than $40/share (if you bought back at $0.00)
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