I’m sure you have watched Casino Royale. In that movie, Le Chiffre (Mads Mikkelsen) a banker; plans to make profit when the Skyfleet stocks goes down. In The Taking of Pelham 123, we learned at the end that Ryder (John Travolta) also made good profit when the NYSE crashed due to the event took place in New York.
But how do you actually make money from falling stock prices ? Here’s an easy explanation that I’ve found.
At any given point, only a certain amount of a publicly traded company’s stock is floating freely in the market. The rest is held in various portfolios, funds, and investment vehicles. Now, everyone’s familiar with the basic idea behind the stock market: you buy stock when it costs little, and you sell it when it costs a lot, profiting on the difference.
But that assumes a company’s value is going to increase. What if, instead of betting a company will go up, you want to make money betting the company will go down? You can — by selling stock you don’t own.
Say you borrow a certain amount of stock from someone who already owns it. You pay a fixed fee for borrowing the stock, and you sign a contract saying you will return exactly the same amount of stock you took after some amount of time. So, you might borrow a thousand shares of Apple stock from me (I don’t actually own any, but play along), pay me $100 for the privilege, and sign an obligation to return my stock in 3 months. At the time, Apple stock is worth $10 per share.
After you borrow the stock, you immediately sell it. At $10 a share, you get $10,000. Two and a half months later, another rumor about Steve Jobs’ health sends AAPL crashing to only $6 per share for a few hours, so you buy a thousand shares, costing you $6,000. You give me back those shares. Because you successfully bet the company would go down in value, you earned $4,000 minus the borrowing fee. This is called short-selling or shorting the stock, and the downside is obvious: if your bet was wrong, you would have lost money buying back the shares that you have to return to your lender.
I’m sure there’s more complexity to it, but hey, like Albert Einstein said, everything should be made as simple as possible, but not simpler. The article is very interesting, you’ll love it – How Porsche hacked the financial system and made a killing. Other articles on short selling / shorting stocks for you to explore / learn more about it:
When the market tumbles, you might not make money, but it's a great time to set your self up for the future while prices are so low. I am looking at stock in a company called Mentor Capital (MNTR.PK) because of it’s ground level opportunity to buy low while their merger company is still in the clinical trial stage of their brilliant new breast cancer treatment that beats all other treatments in terms of effectiveness and side effects. Once the treatment hits the market the stock can potential jump by leaps and bounds.
How does one make money when the stock market tumbles?
I’m sure you have watched Casino Royale. In that movie, Le Chiffre (Mads Mikkelsen) a banker; plans to make profit when the Skyfleet stocks goes down. In The Taking of Pelham 123, we learned at the end that Ryder (John Travolta) also made good profit when the NYSE crashed due to the event took place in New York.
But how do you actually make money from falling stock prices ? Here’s an easy explanation that I’ve found.
I’m sure there’s more complexity to it, but hey, like Albert Einstein said, everything should be made as simple as possible, but not simpler. The article is very interesting, you’ll love it – How Porsche hacked the financial system and made a killing. Other articles on short selling / shorting stocks for you to explore / learn more about it:
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