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Current time:0:00Total duration:3:29

Video transcript

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 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 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 you would sell it at the current trading price of $50 you would then hope that the stock price goes down so in this situation let's take think about the situation where the stock price goes down so if you shorted it right over here you borrow 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 you can buy the stock you can buy 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 can 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're able to sell it and buy it later for a lower price so in 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 you would have shortened the stock you would have made you would have made $30 let me write this column here this is the shorting 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 you bought it back for 20 so you had $50 of proceeds you have 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 bed is wrong what happens if the stock price goes to 80 and over here you get so scared you're like oh my god I have to buy this stock back by 81 if it keeps going up I can lose an unlimited amount of money so over here you get scared and you unwind your situation you say okay 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 can 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 thirty dollars your thirty dollars in the hole so now you are at negative negative thirty dollars and really shorting is the riskiest of all of the things you can do because a stock price can go unbelievably high what happens if the stock price goes to $800 it goes to $8,000 you all of a sudden you've 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