I just cannot, for the life of me, understand how you make a profit by it.
In: Economics
Short-selling is just an investment strategy that can be used to profit when the price of something goes down, by selling something when the price is high and buying it back after the price drops.
Imagine you believe that the price of gasoline is going to go down a few days from now, and you want to profit from that information. Today, gasoline is $4/gallon, but you think that in a few days it’ll be $3/gallon.
You know a guy that has a giant tank of gasoline in his back yard. So, you ask him if you can “borrow” 100 gallons of gasoline from him. You even offer to pay him a $10 fee for the privilege of borrowing the gasoline, and you promise to return the gasoline to him in a few days. He agrees to this arrangement and gives you the 100 gallons of gasoline.
Since gasoline is worth $4/gallon today, you now have $400 worth of gasoline. After borrowing that gasoline, you go out on the street and sell that gasoline for $400. You put the $400 under your mattress for now. A few days later, just as you predicted, the price of gasoline drops to $3/gallon. So, you go to a gas station and buy 100 gallons of gasoline for $300. You take this gasoline back to the guy you borrowed it from, and return it to him as promised.
In the end, you sold the gasoline for $400 and then bought it back for $300. You also paid a $10 fee for the privilege of borrowing the gasoline. So, your overall profit was $90.
This is how short selling works, except you’re borrowing/selling/buying stocks instead of gasoline.
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