#ECON101

* A Thread

Episode 1: Shorting Stocks.

I'm gonna show you basics of what I've learned about Shorting

Shorting is the act of borrowing financial assets, like stocks, with the intent of selling it. Afterwards, you buy back the stock to give back to the lender.

The aim of shorting is essentially making a bet that a companies stock price will decrease over time and using it as an opportunity to make money from its devaluation on the stock market

Allow me to demonstrate.
Trader A through analysing Apple's performance has predicted that the companies stock market value will decrease. Trader A goes to a 'Broker', a financial firm that holds assets with to help a seller find buyers in the stock market for a commission.

Trader A predicting that Apples Stock price will go from £1000 to £500, Trader A, who has £500, asks to borrow one of the Broker's stocks of Apple. The broker agrees on an interest rate of 10% of Apples stock price (£110 per year in interest payments).

Trader A takes the apple stock and then sells it immediately to get £1000. Trader A now has £1500. However, A needs to return the stock to the Broker. Before he does, he waits to see if Apple's stock price will devalue to £500 before buying it back.

If this actually happens. Trader A will be able to buy the stock £500 cheaper than A sold it for. After returning the Apple stock, after 1 year paying interest (£110) for the sake of this example; Trader A successfully makes £390 profit from this whole bet.

Trader A went from having £500 to £890.

This is how shorting works. It's a risky bet that can be used to make money from predicting another companies failure.

Let's say that Trader sells the apple stock for £1000 and afterwards, the apple stock price actually increases to £1500. Trader A has to buy back the stock to give it back to the broker. A has a total of £1500. Buying apple stock would BANKRUPT A.

This is why shorting is an incredibly risky endeavour and involves experience and knowledge of the stock market, economy and business. Making the wrong move could mean losing everything.

Fun fact. This is how Reddit bros are wiping out whole hedge funds who were shorting against GameStop. By buying dozens of shares of GameStop to inflate it's stock market price

If you liked this thread, please retweet and give feedback if I missed something or got something wrong! Thank you!

Sources here
Shorting

Broker definition
https://www.investopedia.com/terms/b/broker.asp
Simple interest
https://www.investopedia.com/terms/s/simple_interest.asp#:~:text=Simple%20interest%20is%20calculated%20by,are%20usually%20simple%20interest%20loans.