I don't understand how someone makes money when gold is dropping, can anyone break this down for me?

mrpaseo

I do not understand selling short and how people make money as SPOT price drops... Is there a link or can someone explain it to me please.

Thanks,
Ray

bronco2078

I think this video will help break it down

derryb

<< <i>I do not understand selling short and how people make money as SPOT price drops... Is there a link or can someone explain it to me please.

Thanks,
Ray >>


Basically a bet that price will drop. If price drops you win bet. If price goes up you lose bet.

The simple explanation.

Inverse ETFs are an easier way to short.

ETF resource site

mrpaseo

<< <i>I think this video will help break it down >>



Damn it, I just spent two hours on YouTube... that place is a trap.

daOnlyBG

A "short" is a selling something you don't have, with the agreement that you will "buy it" later to cover up the fact that you never had it.

Real life example: I shorted Goldman Sachs back in 2010 (best financial decision of my life). In other words, I short sold stocks I did not have. I think I shorted around $155. The stock plummeted to something around $50 (we'll call it $55 just to be safe and to make the math simple). So, I sold a bunch of stocks I didn't have at $155, and then "covered" my short when the stock hit $55. That's a $100 difference. So, for each stock I short sold, I made $100.

If that still doesn't make sense, let's use coins as an example. Suppose there was a system that allowed me to sell coins I didn't have at the moment of the sale, as long as I paid for them eventually. I "short sold" Rick Snow's 1888/7 Indian Head Penny that he cherrypicked on eBay when it was worth, say, $9,000. What does that mean? I've never owned it in my stock, but I sold it to Dolan (he's on the boards) for $9,000 (this is my "short"), with the promise that I'd pay Rick Snow for it later (at some date). Dolan pays $9,000 for it. A month later (that agreed upon date) the coin drops in value to $1,500. So I go to Rick Snow and pay $1,500 for it (this is my "cover"). I sold something for $9,000 and paid $1,500 for it... it's just like a regular sale, but the payment order reversed. My profit? $7,500.

That, in a nutshell, is how people made money when gold sunk.

Now, consider this: I buy that cent for $9,000, but the market value skyrockets to $900,000. Then I'm screwed- and not in a good way. I sold it to someone for $9,000, but I'll have to pay $900,000 for it. I'm $891,000 in debt.

Thus, theoretically, there's a limited amount of money you could make while shorting: if you shorted the 1888/7 cent at $9,000 and the value dropped to $0.01, then your profit is $8,999.99. However, there's no ceiling to how much you could lose on a short: if you shorted the 1888/7 cent at $9,000 and the value skyrocketed to $2.5 mil, your losses sum to $2,491,000. But what if the value skyrocketed to $5.5 mil? $25 mil? People have committed suicide over shorts that went the opposite way.

Depending on the short, your brokerage firm has to require you to have an ample amount of money if the short you make turns into a massive loss. The amount they require is usually based on some standard deviation of what they expect the loss could amount to (I think ~2.5).

VanHalen

Simplest way to think about it was from my finance professor: "Short = Sell"

Shorting is selling with the expectation of a price drop so you can buy it cheaper in the future. The party "shorting" normally pays a fee for the right to sell short.

Dolan

<< <i>A "short" is a selling something you don't have, with the agreement that you will "buy it" later to cover up the fact that you never had it.

Real life example: I shorted Goldman Sachs back in 2010 (best financial decision of my life). In other words, I short sold stocks I did not have. I think I shorted around $155. The stock plummeted to something around $50 (we'll call it $55 just to be safe and to make the math simple). So, I sold a bunch of stocks I didn't have at $155, and then "covered" my short when the stock hit $55. That's a $100 difference. So, for each stock I short sold, I made $100.

If that still doesn't make sense, let's use coins as an example. Suppose there was a system that allowed me to sell coins I didn't have at the moment of the sale, as long as I paid for them eventually. I "short sold" Rick Snow's 1888/7 Indian Head Penny that he cherrypicked on eBay when it was worth, say, $9,000. What does that mean? I've never owned it in my stock, but I sold it to Dolan (he's on the boards) for $9,000 (this is my "short"), with the promise that I'd pay Rick Snow for it later (at some date). Dolan pays $9,000 for it. A month later (that agreed upon date) the coin drops in value to $1,500. So I go to Rick Snow and pay $1,500 for it (this is my "cover"). I sold something for $9,000 and paid $1,500 for it... it's just like a regular sale, but the payment order reversed. My profit? $7,500.

That, in a nutshell, is how people made money when gold sunk.

Now, consider this: I buy that cent for $9,000, but the market value skyrockets to $900,000. Then I'm screwed- and not in a good way. I sold it to someone for $9,000, but I'll have to pay $900,000 for it. I'm $891,000 in debt.

Thus, theoretically, there's a limited amount of money you could make while shorting: if you shorted the 1888/7 cent at $9,000 and the value dropped to $0.01, then your profit is $8,999.99. However, there's no ceiling to how much you could lose on a short: if you shorted the 1888/7 cent at $9,000 and the value skyrocketed to $2.5 mil, your losses sum to $2,491,000. But what if the value skyrocketed to $5.5 mil? $25 mil? People have committed suicide over shorts that went the opposite way.

Depending on the short, your brokerage firm has to require you to have an ample amount of money if the short you make turns into a massive loss. The amount they require is usually based on some standard deviation of what they expect the loss could amount to (I think ~2.5). >>


With the exception of me being on a crappy end of a s*** deal, this explanation is spot on

mrpaseo

Excellent, thank you all. I got it now.

mrpaseo

What's the time limit? It's a promise to buy something in the future right? So assuming I promise to buy a St G within the next 45 days (Without an agreed price) but I make an agreement with a third party to sell at a specific amount, hoping that the price of the ST G will be cheaper in the future....

I think I got it.


(I really need to stop posting from my phone, I miss all the typos).

guitarwes

Just don't get caught with your pants, eh, shorts down.....

drwstr123

<< <i>Excellent, thank you all. I got it now. >>


Me too. Thanks greatly.

cohodk

<< <i>

<< <i>A "short" is a selling something you don't have, with the agreement that you will "buy it" later to cover up the fact that you never had it.

Real life example: I shorted Goldman Sachs back in 2010 (best financial decision of my life). In other words, I short sold stocks I did not have. I think I shorted around $155. The stock plummeted to something around $50 (we'll call it $55 just to be safe and to make the math simple). So, I sold a bunch of stocks I didn't have at $155, and then "covered" my short when the stock hit $55. That's a $100 difference. So, for each stock I short sold, I made $100.

If that still doesn't make sense, let's use coins as an example. Suppose there was a system that allowed me to sell coins I didn't have at the moment of the sale, as long as I paid for them eventually. I "short sold" Rick Snow's 1888/7 Indian Head Penny that he cherrypicked on eBay when it was worth, say, $9,000. What does that mean? I've never owned it in my stock, but I sold it to Dolan (he's on the boards) for $9,000 (this is my "short"), with the promise that I'd pay Rick Snow for it later (at some date). Dolan pays $9,000 for it. A month later (that agreed upon date) the coin drops in value to $1,500. So I go to Rick Snow and pay $1,500 for it (this is my "cover"). I sold something for $9,000 and paid $1,500 for it... it's just like a regular sale, but the payment order reversed. My profit? $7,500.

That, in a nutshell, is how people made money when gold sunk.

Now, consider this: I buy that cent for $9,000, but the market value skyrockets to $900,000. Then I'm screwed- and not in a good way. I sold it to someone for $9,000, but I'll have to pay $900,000 for it. I'm $891,000 in debt.

Thus, theoretically, there's a limited amount of money you could make while shorting: if you shorted the 1888/7 cent at $9,000 and the value dropped to $0.01, then your profit is $8,999.99. However, there's no ceiling to how much you could lose on a short: if you shorted the 1888/7 cent at $9,000 and the value skyrocketed to $2.5 mil, your losses sum to $2,491,000. But what if the value skyrocketed to $5.5 mil? $25 mil? People have committed suicide over shorts that went the opposite way.

Depending on the short, your brokerage firm has to require you to have an ample amount of money if the short you make turns into a massive loss. The amount they require is usually based on some standard deviation of what they expect the loss could amount to (I think ~2.5). >>


With the exception of me being on a crappy end of a s*** deal, this explanation is spot on >>




Actually there are a lot of "technicalities" that are not properly addressed, but for the sake of the OP this is close enough.

s4ny

A futures contract is an obligation to deliver or take delivery of a commodity at a specific future
date. Almost all contracts are closed out prior to that date.

Because delivery is in the future, it is just as easy to sell first and they buy to cover later.

Selling short a stock is a bit more complicated because the shares have to be borrowed by the
short seller and then delivered to the buyer to whom he sold. A few years ago there was a short
squeeze on Volkswagen shares and the company became the most valuable company on Earth
for a day or two.