I just cannot, for the life of me, understand how you make a profit by it.
In: Economics
I am a bank. As a bank I hold 1000 shares of AAPL in my investment portfolio. This is because I want to make money on the stock market. The mechanism? Line go up.
You are a day trader. You want to short sell. You come to me with a proposition. You will take 500 of my shares of AAPL, and return them to me in a month. You will pay be 1$ a share if I do this. This is written into a contract.
The bank loses nothing. There is no risk. They want to buy and hold AAPL. You will make sure they have all 1000 shares in a month, that’s what the contract obliges. In addition, the bank will be gaining 500$ on the transaction, as a fee for loaning the shares.
You, the day trader, want to make money? Right? Well you borrowed from the bank, because you THOUGHT the stock would go down in price. You’re taking a risk based on your own projections.
So how does that function work? Let’s say AAPL is 100$ a share. You anticipate it will decrease to 90$ a share in 2 weeks. What do you do? You take those shares that you borrowed? And you sell em to the highest bidder. You get 50,000$ for this, in cash. Then you wait. In 2 weeks the price drops to 90$. Now you buy the shares back from the market to fullfill your contract. You’ve spent 45,000$ on new shares. You spend 500$ on fees to the bank and walk away with a sum of 4500$ profit. Yay!!!
There is risk. What if the price goes up instead??? Well you sell the shares to the market and it gives 50,000$. Then in 2 weeks the price rises to 110$ a share? Now in order to fullfill your contract you must spend 55,000$ on new shares. That’s 5,000$ of your own money, and now 500$ in fees.
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