If you’ve ever watched business news, and think you’re listening to a foreign language, don’t worry. You’ve got plenty of company.
Business and finance news is jargon-ey. Some would argue that this is intentional. If investors don’t understand how Wall Street does business, Wall Street can do what it wants with their money.
CGTN’s Bianca Davie breaks it down.
Here’s how you short a stock: We’ll use stock from a fictional company, called Clown College Limited.
You read in the news that families are hiring fewer clowns for parties-for some kids, clowns are more terrifying than funny.
That doesn’t bode well for the college. At $50 a share you think its stock is overpriced. You borrow 100 shares from your broker-at $50. Your broker charges a fee to lend you the stock.
You then sell the borrowed shares. You deposit the proceeds at the brokerage-in this case, $5000.
After you’ve done this, news breaks that global demand for clowns has fallen to its lowest level ever.
The college’s incoming class shrinks by 95 percent. No one at the college is laughing. Clown College shares plummet to just five dollars each.
You now buy back the same number of shares at a steep discount.You sold 100 shares for $5000. Now you can buy them for just $500. That amounts to a 90 percent discount.
After you do this, you return the 100 shares you borrowed, pay the stock loan fee and keep the difference.