Occasionally, at a social function or while scrounging through a dumpster in back of Arby’s, I’m asked the question “What do you do for a living?”
Sometimes I’ll just say that I work in an ice cream shop or huck a handful of soggy curly fries at them. But if pressed, I will cop to the fact that my work is related to the stock market.
This revelation usually prompts looks ranging from excitement to Schadenfreude, depending of course on what phase the market is currently in. If it happens to be in a downtrend they’ll usually give me a pitying look, saying something like “wow, things must be pretty tough, huh?” I, of course, respond that I am doing fine because you can make money when stocks move down.
(insert glazed look in conversationalist’s eyes).
My mother actually thinks I’m describing something illegal when I tell her money can be made by shorting a stock. She’s convinced that it must be some evil endeavor created by a Satan/Hitler/Beiber-type troika. Personally, I’ve never had an issue with the concept of shorting, which is probably why I’ve traded for over 30 years. But for others who don’t quite understand the concept, I’ve developed a simple way to explain it. It goes like this;
A share of stock is a standardized instrument just like a book or a DVD, meaning every share of Apple is the same as every other share of Apple, just like every DVD of Harry Potter and the Deathly Hallows is the same as every other.
So let’s say your best friend just bought a brand new copy of Harry Potter and brings it over to show you. The first thing you should do is ask yourself is why you have a 13yr old as your best friend, but after that, let’s say you immediately ask to borrow the DVD before it’s even unwrapped.
At some point you will have to return it to your friend — I mean, not really since you can probably beat up a 13yr old — but assuming you’re a decent person you’ll eventually give it back.
Now, let’s say that you take the copy you borrowed and sell it. Maybe you sell it on Ebay, maybe at a garage sale, maybe to an individual, it doesn’t matter where, but you get $25.00 when you do. However, you still owe your friend one copy of Harry Potter, so you order a copy on-line from a discount DVD liquidator that only costs you $19.95.
When the DVD arrives you return it to your friend, keeping the difference between what you sold it for ($25.00), and what you bought it back for ($19.95). Thus you’ve made money by selling something you did not own and then buying it back (and replacing it) for less that you sold it for.
Short selling is the same concept; you just replace a share of stock in XYZ company for the copy of the Harry Potter DVD.
In the above example, the venue where you sell the DVD could be anywhere, but with stocks, it’s the open market. If you were unable to buy the DVD back for the $25.00 or less that you sold it for you would have had to cover the difference out of your own pocket making it a money-losing trade. Or you could just tell your friend you lost the DVD and say “what the fuck you gonna do about it punk?”
The same concept applies for the stock market example as well (minus the “punk” part).