Shorting stocks is when you sell a stock you don't actually own. You borrowed it.
If you only have $150 when the loan shark comes to collect his $200, you're SHORT $50. That's where the terminology comes from.
When you sell stock that you borrowed, you still owe it back to the lender. So until you buy it again, you're going to be short the amount you borrowed.
Most people are familiar with the idea of buying a stock at one price and hoping to sell it at a higher price to make a profit. If you sell at a lower price, you make a loss. Pretty simple.
Generally owning a stock means you believe the price will go up, because if you thought it would go down, you'd sell it. Owning a stock is referred to as having a "long" position in that stock.
Having a "short" position in a stock is exactly the opposite. It generally means you think the price will go down. The way you make money shorting is the same though, you want to buy low and sell high. The difference is that you're doing it in the opposite order. You're trying to sell high and THEN buy low.
But you can't sell something you don't have, so the way it works is you first have to borrow the stock from someone. You then sell the borrowed stock at market value.
The lender wants their stock back, so you're hoping the price will go down before the lender comes looking for their stock.
If it goes down, you buy it for less than you sold it, and make a profit. If the price goes up, you have to buy it for more than you sold it, so you make a loss
That's the idea behind shorting. You're betting the price will go down. So process is pretty basic - borrow, sell high, buy low.
Last time I gave an introduction to what short selling, or shorting, is.
When you short a stock, you're borrowing it from someone else. As with most things, people don't lend valuable goods for free.
similar to a financial loan, borrowing a stock for the purpose of shorting it comes with a fee. This fee is simply called the Stock Loan Fee.
The rate of the fee will depend on how easy or difficult it is to acquire the stock, as well as for how long you borrow the stock.
The Stock Loan Fee is an important factor to consider when calculating the feasibility of the short you are considering, and this will play a role in future Rackets where I will take a closer look at the potential risks and rewards of shorting.
As we have learned so far, shorting a stock is a bet that the value of that stock will go down.
Insurance, whether it be health, home or some other insurance, is actually the same thing when you think about it.
When you short a stock you will pay a fee to bet that the value of the stock will go down. If it doesn't go down, your loss is the fees you paid. If it goes to zero you win the full value of the stock, minus the fees you already paid.
Now let's think about something like house insurance.
You pay a fee in case something happens to your home that would cause its value to go down. If nothing happens, your loss is the insurance premiums you paid. If the house burns down (aka, it's value goes to zero) you win the full replacement value of the house, minus the fees you already paid.
The same goes for health insurance. It's a bet that the value of your health will go down. If you stay healthy, then your loss is the fees you pay each month. If you get sick, you win money equal to the cost of getting you back to normal health.
So insurance, just like shorting a stock, is simply a bet that the value of something is going to decrease. Insurance is essentially a bet that a bad thing will happen.