To have a stock is to make a bet on the cash flow of a corporation. That I understand. When you...
guess right, you are rewarded from the profits of said corporation. But when you "short" a stock, you are betting "against" said corporation, aren't you? Who pays you if you guess right? Surely you are not paid from the corporation you bet against? Who pays you in this instance?
That you own the stock already says you put your faith on that corporation. The long and short are your feelings on the temporary valuation of the stock...
In order to "short" a stock you must first have a margin account with a brokerage firm. Let's say you have a hunch or reason to believe that a particular stock is going to fall. Using your margin account you "borrow" 1000 shares of that particular stock from your broker. These share have to be replaced in a very short time frame because, believe it or not, the broker "borrowed" them from one of his clients portfolio.....and yes this is legal!.
You turn around and sell the 1000 shares for the going rate of $20. Lets say your "hunch" was correct and the shares fell to $15 a few days later. You would then buy back the 1000 shares at $15 and return them to your broker to replace the ones you "borrowed". So in essence you would have returned the 1000 shares and at the same time realize a profit of $5 per share or $5000...not bad for a few days work. It should also be noted that this can be a very "dangerous" level of investing. While you make money in the above example........you could lose big time if the stock increases in value. You would still have to replace the "borrowed" stock only you would have to pay the difference. In the above example if the stock increased to $25 you would lose $5000.
. The corporations are not actively involved in this scenario. These investors buy and sell many different stocks with no ties to the actual businesses. Their shares are in the stock market and are bought and sold everyday by all levels of investors. If you, yourself, have an RRSP account or a retirement fund through your employer you are indirectly involved in the stock market every day. The fund manager who manages "your" investment accounts buys and sells , on you and your co-workers behalf, regularly. including in some instances "shorts".
Investors realize their money by buying and selling stocks through brokers. When a stock transaction takes place the broker who handled the sale pays the investor and the investor pays the broker his "fees".
Sorry for the long answer. I hope it helps.
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mean buying stock in a band or writer, photographer, even a filmmaker. Not in the traditional 'fund-raiser' sense, but actual shares of digital media.
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What is to Buy Stocks On Margin?
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