Let's say you don't like
company ABCD very much and you're convinced that the
stock is going to go down. So in that situation, you
can actually short the stock, which in a very
high level is a bet that the stock is
going to go down. And the way that you
do that mechanically is that you borrow the stock
from someone else who owns it, and then you immediately
sell that stock that you don't even own. You sell the stock that you
borrowed from someone else, and you'll sell it
at the current price. So, for example,
in this situation, you would sell it at the
current trading price of $50. You would then hope that
the stock price goes down. Let's think about
the situation where the stock price goes down. So if you shorted it right over
here, you borrowed the stock and you sold it for $50. And then if the stock were
to actually go down-- let's say it goes all the
way down to $20, and you think that's about
how far it's going to go down, then you can buy back the stock
for $20 in this situation. And then give it
back to the owner. You had borrowed the stock. Now you can hand back
the stock to the owner. So you could give it back and
you've essentially unwound it. And what it allowed
you to do is it allowed you to do the buying
and selling in reverse order. Normally before
you sell something you have to buy something. But here you were able to
sell it and buy it later for a lower price. So the situation
where the end price is $20 you had sold it for $50. So you got $50. And then you had to use
$20 of it to buy it back. So in that situation,
shorting the stock, you would have made $30. Let me write this column here. This is the short option. You sold at $50. You borrowed and sold at $50. Then when it went down to $20
you bought it back for $20. So you had $50 of proceeds. You had to use $20
of it to buy it back. So you had a $30 profit. But that's only in
the good scenario. What happens if
your bet is wrong? What happens if the stock
price goes up to $80? And over here you get so scared. You're like, oh my god, I have
to buy the stock back by $80. What if it keeps going up? I could lose an unlimited
amount of money. So over here you get scared
and you unwind your situation. You say, OK, I'll go and
buy the stock for $80, so I can give it back. So in this situation
where the stock goes up you actually could
lose a lot of money. You had sold it for $50. So you only have $50 that you
have from the transaction. But now you have to
buy the stock for $80. So if you sold for $50
and you buy for $80 you've now lost $30. You're $30 in the hole. So now you are at negative $30. And really shorting is the
riskiest of all of the things you can do, because a stock
price and go unbelievably high. What happens if the stock price
goes to $800 or goes to $8,000? All of a sudden, you've
sold something for $50 and you have the obligation
at some point in the future, because you have to
give the stock back, of paying $500, or
$800, or $8,000. You don't know how much
you'll have to lose. So it's really the
riskiest thing you can do. But it is one way to bet that
a stock price will go down, or profit from a stock
price going down.