I just cannot, for the life of me, understand how you make a profit by it.
In: Economics
When you buy a share of stock from a broker, the idea is that the broker will take your money and execute a trade with the stock exchange to purchase a share of the stock. Then the broker will posses a share of stock and a ledger that says that the stock belongs to you. When you want to sell the stock, the broker again goes to the stock exchange and executes a trade to sell the stock, and gives you the money (minus their broker fee). That’s the simplest concept of how it works.
But it gets a little more complicated. Sometimes the broker has a pool of stock themselves. So when you go to purchase a share of stock, the broker might sell you the stock “over the counter,” meaning they sell it to you directly themselves from their pool of stock instead of going to the market to execute a trade. Sometimes the broker will make money off of this process. If they bought the stock previously and then it went up by the time you bought it, the broker made money selling it to you for a higher price than they paid. If the broker believes a stock will go up they might do a lot of this (buy a bunch of stock themselves and then sell it over the counter to their customers when it goes up).
And then it gets even more complicated than that. A customer might come to the broker and ask to purchase a share of stock that the broker believes is about to go down. In that case the broker might update the ledger that says that the customer owns a share of the stock before the broker even owns the stock themselves. The idea is that the customer will pay them the current market value for the stock, but the broker will wait a bit before actually buying the stock. If the broker is right, they’ll end up buying the stock for less than the customer paid them, and they’ll get to keep the difference. Selling the stock to the customer before the broker even owns the stock themselves is the original concept of “short selling.” The broker is literally “short,” as in they don’t have enough shares of the stock to cover what they owe their customers.
Since then the concept has been generalized to mean any time that you sell a stock that you don’t own. For regular people that are not brokers, this generally means borrowing some stock and then selling it. The idea being that if the stock price goes down you’ll be able to buy it back for cheaper, pay back the loan and keep the difference.
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