Dumb questions thread

1 http://www.investopedia.com/terms/s/shortselling.asp
2 http://www.investopedia.com/terms/l/leverage.asp

>>1151908
Imagine this:
You know that the stock will drop in price next month.
Current price $100/share
Price in a month $20/share
You go to a broker and borrow 1000 of that stock at current price of $100/share. You now must return those borrowed shares to that broker next month, exactly the same amount(but price can change).
So you have these 1000 and you immideately sell them to someone for $100.
You still owe broker 1000 shares. But now you have $100,000 in oyour pocket instead of shares.
Next month stock's price drops to $20/share like you predicted.
You buy 1000 of that stock at $20/share now.
You return those shares back to broker and pocket the difference.
That's shorting a stock.

Shorting is a dangerous game.

When you hold, you're at risk of losing 100% of your investment with infinite gain.

When you short you're at risk of infinite loss, with a max of 100% gain.

In other words, say the share is worth $100 right now. But you .. "know" .. it will drop to $20.

So you short it.

But the stock could grow. To $200. $300. $1000.

You borrowed 1000 shares and cashed em in for $100,000. In one month you could owe $200k. $300k. $1million.

This has happened many times. There's a story from the great depression of either a steel company or a rail company who'd dropped from $2 or $3 a share to about ten cents. Investors shorted it. It bounced back to something like $100.

>>1151945
Thank you very much for the detailed example, honestly I couldnt get anything out of investopedia.

>>1151981
Can you tell me the stock that reached infinity?
When you Long you have the chance of reaching 0 pretty quickly. Look at Lehman Bros, and Enron.

>>1151981
No one in their right mind shorts penny stocks. They short huge over priced stocks. b/c the risk to reward ratio is there. Sure Apples the biggest company in the world, but its lonely at the top and it only takes one to knock you off that peak.

Leveraged Trading takes a few forms.
Derivatives and margin mainly.

If you structure these trades well. You can win big.
Say you've got 100k. and only want to risk 1% per trade. You set your stops at 1k loss or use options and only roll when 1k down.
To the unleveraged trader this is say 10$ down on a 100$ stock. to the leveraged trader its 1$ on 100$ stock. but the reward is much better.
$1000 dollars risked. but $1000 gained for every dollar move in stock. vs 1000 risked for 100$ every dollar move.

stock direction is a 50/50 bet. If you bet 1/10 risk reward on 50/50 you're gonna lose a lot. 50/50 odds require 1/1 risk reward at minimum.

>>1152063
> being this dumb

What he means is that when you buy a stock at $100, and it goes to $0, all you lost was $100. When you short a stock, there is no limit to your loses.

Shorting => there is a cap on gains, no cap on loses.

Buying => there is a cap on loses, no cap on gains.

>>1152076
Yea I can't remember the name of the stock now but when the Great Depression was first manifesting and stocks were dropping there was either a steel company or rail company that sold at roughly $5/share (that was a lot of money in those days)

It had dropped to about ten cents (kind of average in those days)

Thousands of investors shorted it. Cashed out the shorts for a cool $10,000 or so (also a lot of money in those days)

Hoover tried to implement some massive rail project to fix the crumbling economy. Boom. The stock bounced up to almost $100/share (which was unprecedented and would be like $1000/share today)

Suddenly there are thousands of investors and even investment firms on the hook for tens of millions of dollars.

***
Since then, safeguards have been put in place.

But my assertion stands.

If you short a stock, you are positioned to gain no more than a 100% return on your investment, with infinite/limitless losses.

Shorting is a dangerous game. With pennies, and with blue chips alike.

>muh infinite losses meme

just set a stop limit you pussies

>>1152129
Happened during 9/11 with airline stocks, stories arose about some wall streeters shorting them barely 5 minutes into when the first plane hit

>ask /biz/ what to do
>tell me to get a job
>finally got a job
>$12/hr, massive debt, no other bills
now what? what my is my road to wealth?

When people are buying and selling cryptocurrency, like say ETH, are they using it to buy BTC and then sell that for real money on those sketchy "bitstamp" type sites? Not shilling, just very new to this. Want to know how people are planning to go to san tropez with fucking cryptocurrency

>>1151945
Thank you

>>1152129
>Shorting is a dangerous game
In theory, yes. And I won't disagree with the 'limited profit, unlimited loss" argument.
But if you look at the big picture, you're somewhat protected from vast price swings regardless of the direction you pick.
That is to say, the chance that you're on the hook for double when shorting Priceline as it doubles is about as likely as being long and losing everything when Priceline suddenly goes bankrupt.

>>1152934
They're just buying and selling it like they would with stocks (except crypto has no quantitative data available to back your decisions.) BTC doesn't come into the equation with a lot of cryptos as you can buy/sell them directly to people for USD.

It's incredibly stupid and to try to daytrade crypto, but if you get in early on something that skyrockets its insane returns.

I hate when people describe shorting as "betting an instrument will go down". Yes that's what you're doing conceptually, but mechanically it's not the same process as going down to the track and placing a wager.

A short sell is when you sell a borrowed share as opposed to an owned share. Since you don't own the share you're selling, you need to repay it, called "covering". You cover the short by purchasing the same share at some point in the future.

Long is just buying and holding. It just means your position on that financial instrument is hopeful it'll go up.

Leverage is trading on margin. It's when you trade instruments you haven't paid for in full yet. A short is technically leveraged trading, since you will need to put up some collateral as long as you haven't covered the short.

Let's say XYZ is trading at $100/share. You want to take a short position, meaning you expect it to go down in value. You borrow 1 share and sell it for $100. You don't get paid the $100 until you cover. But the broker doesn't know if you'll be able to cover or not so he makes you put up some collateral. Say you put $10 on deposit with him to make the short. Now let's say the share value shoots up to $200. The broker thinks it's getting riskier because the stock is going up instead of down so he gives you the choice of covering by end of day or putting another $10 on deposit with him. If you cover now you owe $200 in exchange for $100, incurring a loss. But you think it's definitely going to go down so you keep your short position by depositing another $10. Next day it goes down to $1. You cover by purchasing the share for $1 and giving it to the broker. Broker releases the $100 you're owed because that was the price when you shorted. You withdraw your $20. You're now up $99. Congratulations you just completed a leveraged short.

>>1153042
>so you keep your short position by depositing another $10
You know this isn't how people do this, right?
I'm not talking about your $10 example, but the fact that its the behavior of someone who made a bad decision.
Whether that decision was not keeping an adequate amount of capital in their account to cover their trade (and avoid margin calls like this), or shorting the stock in the first place is immaterial.
I don't hesitate to short, and have never had to do what you describe.

>>1153056
I just wanted to give a margin call example because it simultaneously illustrates leverage and shorting, both of which OP was asking about.

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>>1153059
That it does.
But leveraged shorting is kind of out of the norm for beginners.
You may have actually made it harder for him to grasp. Or would have, if he hadn't left the thread 15 hours ago.

>>1153042
Thank you for the explaination,
Another question
Do brokers always require for you to put up some collateral when you open a short position?

>>1153059
>if he hadn't left the thread 15 hours ago.
or not

>>1153042
Also something else. Does leveraging exist only for short positions?

>>1153014
Thank you kindly :)

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So I'm new to fidelity brokerage account and have an idea of some stock to buy. But one is a penny stock and has a reasonable chance of going up, and I intend to sell if it does.

If I understand correctly, I can just turn around and sell, yes? I read somewhere on their site something that seemed to imply they were just loaning me the stock, which would suggest that I'd be shorting it when I put in the trade to sell it.

Is that right?

>>1153550
>I can just turn around and sell, yes?
Assuming you bought it more than 3 trading days before you do, yes.

>>1153810
Thanks. Also read on thestreet that you need a margin account to short stock, so I should be good (don't plan on pursuing one)

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Another set of questions.
What is an index fund?
What is a hedge fund?

Why are people constantly saying that you're better off investing in index funds rather than an individual stock.

>>1153838
Because the vast majority of stock traders and managed funds don't consistently beat the market and thus usually make less money (or lose money) compared to a simple low-cost index fund.

>>1151908
>ITT: Trading in the 1920's and beyond
Just get a margin account. Don't bother with this bullshit. Only suckers actually own stock when "trading" it. Owning stock is only good for longer-term investments, and then only in the form of an index, which again, means you don't actually own the stock.

Just stick with derivatives and related products. Forex, indices, derivatives of stocks, that sort of thing. Margin account. It all basically works the same then, short/long doesn't matter. You'll have a 1:100 leverage minimum with most products, probably not stock though (then again, why you would even want to trade a stock/derivative of one, is beyond me). If you really want to deal with individual stocks, go the futures/options route. Never outright own a stock in your trading account. Only for long-term investment purposes.

I'd say use a stoploss, but it's not strictly necessary with all products, and they sure like to hit them only to turn around within a few pips. I prefer to hedge it with itself (just buying an opposing position), that locks in the loss but also prevents it from growing any bigger while the market screws about (if it starts moving erratically). You can then get out of it later when it turns around (dangerous though, I'd recommend just putting a stop in).

>>1153825
>don't plan on pursuing one
lol, that's what I said too.

>>1153850
>margin account
I have to point out: not one for stocks, futures/options or whatever. Basically, a forex one. But a lot of those allow for trading of indices, commodities and even individual stocks (as derivatives).

If you're in the US, tough luck. Almost nobody wants americans because of regulations related to US citizens.

Futures/options, collecting premium (very safe), if in the US, watch this until you start feeling sick, Dough seems like a great platform but I'm european so I haven't bothered trying it yet: https://www.tastytrade.com/tt/

>>1153838
>Why are people constantly saying that you're better off investing in index funds rather than an individual stock.
Well, an index is just like a thing that tracks and weighs the value of its contents, so something like the S&P 500 takes the top 500 and weighs them according to various stuff (I forgot, size for example). This makes it stable, as a single company crashing won't take the whole thing down. If you own stock in just one company, and it crashes, you lose a lot. If one out of 500 crashes, not so much. It's just a simple way to diversify.

See https://www.bogleheads.org/

>>1153825
>>1153854
>margin boogeyman
I'm not sure if /biz/ is talking about different kinds of accounts or not.

But a margin account is just what you would have by default when trading for example forex. Because of the level you're trading at, changes of 0.0001 in exchange rate, you have to have 1:100 minimum. In europe, something like CMC markets is excellent (if you can get past their shitty platform) since it allows you to trade virtually anything you'd like, with great leverage (charting/control over what you do is great, too, for most of these).

Again, americans have greatly reduced leverage unless you find someone abroad that accepts you.

>>1151981
Can't you just not pay it?

What happens if you don't have anywhere near the assets to cover $1mil?

>>1151908
>Short
Bet the security will go bad in the future. You borrow from someone who has it (you usually will pay a fee to do this), sell to someone else who wants to buy for the current price, then buys it back at a lower price (if your bet is right), then return it to the original owner.
You'll only click sell and close, however.

>Short-term trading
Exactly what the term implies, you're not holding the stock until fundamentals change, you're just "trading" for short term gains.

>Long
It's when you buy a stock, in opposite of short (selling when you don't own it).

>Leverage
It's when you take on debt to finance your investments.
If I got a $1000 loan at the bank and added up with my $100, so I can invest, than my leverage is 10x, or I have 10x as debt as I have in capital.
Brokers let you use a margin account, which is an account that provides you with funds from their own.
The thing is, if you lose 50% of your investment of $100, you lose $50. However if you lose 50% of your leveraged investment of $1100, you lose $550.
Take that into account when there are brokers that offer 1000x leverage, and see what that caused when the SNB unpegged the Franc.

>>1153838
>Index fund
An investment fund that follows an index, eg the SPX.

>Hedge fund
It's a more sophisticated active investment fund for wealthy investors that generally invests in more liquid and riskier assets.

>Why are people constantly saying that you're better off investing in index funds rather than an individual stock.
What they are saying is that you're better off going with the market than beating it.

>>1153882
Can't you just not pay your obligations? The same thing will happen to you when you don't pay for your losses than whe you don't pay your bank fees. Also you will get your credit score downgraded to junk and never be able to invest/have a credit card again unless you settle the debt.

>>1153878
>But a margin account is just what you would have by default when trading for example forex
Yeah, it's just a small percentage of Americans who really even need margin accounts.
Which is good, in a way, because no one want brokerages overrun by shitheels who ruin things by attempting to skip out on their losses.

>>1153882
Sure, you can declare bankruptcy. It worked for Trump. But that's not a great option.

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Is polo or bittrex better?