Stock Market Terminology
Stock Market For Beginners:
Stock Market Terminology: Short Selling
The concept of shorting a stock can be compared to buying a stock but in the reverse order. When we speak of shorting a stock you borrow a stock that you don’t own from your broker and you sell it to someone else at a higher price.
You do this because you expect the stock to drop in price so that you can purchase it back at a lower price.
Let’s use Stock Market Terminology and our Picasso example to explain the concept in more detail.
You are the proud owner of 100 Picasso paintings and you need to raise capital for a business opportunity. You decide to sell your valuable Picasso paintings and use the proceeds for the business.
You have the option of selling your paintings to a gallery, or you could hold a private auction, better yet, you could sell them on the internet?
Because you need to sell your Picasso paintings immediately, how do you create a market where you can sell your paintings at market value and buy them back at a later date at a lower price?
Holding a sale with a discount of 20% on $5400 per painting, brings in a flurry of buyers.
Have you read: Stock Market Terminology:“What is a LONG?”
If not, please visit the page. The understanding the stock market and a long will assist us as we explain the shorting process.
All the paintings have new gleeful owners in just hours and all you ask for is that the new buyer keeps you informed if they sell their
Picasso to another person.
Once all the sales have been finalized, you begin a rumor stating that the Picasso’s sold today may not be the Picasso’s original work. This rumor is only circulated among a small group of art buyers. As the art buyers begin to panic, they offer to re-sell their Picasso pieces at a discount to potential Picasso buyers who were unable to make a purchase at the original sale. Not only do they sell the work, but the sell it at a discount.
Now, the second group of buyers feels incredibly smart for having purchased such great art work for a steal.
The rumor then surfaces to this second group of buyers and they too, try and find a way to rid themselves of this worthless piece of artwork and recoup as much money as possible from the sale. As the paintings circulate, their market value drops until paintings are found in suburban garage sales retailing for $20.
Your short selling strategy has worked beautifully. Because you requested that the owner database is updated every time the Picasso painting finds a new home. You have the names and addresses of all the Picasso owners who bought the work for $20.
Let’s say sixty out of the one hundred Picasso paintings are found and you pay just $20 per piece, this price is a lot lower than the price
you paid for the Picasso’s originally.
If you paid $6000 per piece and you sold them for $5400 per piece, you made a staggering $540 000 although this amount is less than
what you paid for them originally.
You spend $1200 acquiring the sixty Picasso paintings back, and then calm the rumor that the items are fake by having them certified by the best art dealer in the business.
Again the demand for the Picasso paintings increase as the market value soars to $16000 per painting.
That was short selling. Sell high, at $5400 per piece and buy low at $20 per piece of art.
I hope this example of Stock Market Terminology explains the concept of short selling. This is an analogy of Stock Market Terminology
and does not mean that this is how institutional traders move the prices of stocks lower.
As a trader, you do not care who the ‘owner’ of the Picasso is and whether the painting is real or fake.
What we do care about is recognizing a short selling opportunity and taking advantage of it.
The more proficient you become at understanding stock market terminology, the easier it will be for you to make money trading stocks online.
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