An explanation of 'Shorting' and 'Borrowing' (for idiots, like me)!
If you are like me, you may not be real bright. You may have had the notion of 'shorting' or 'borrowing' a stock explained to you, by multiple people at multiple times in multiple ways. For some reason, your mind just doesn't bend that way. Well you are in luck. It just so happens that I short "stonks" all the time. And I do believe I have a great explanation and example of the borrowing and shorting process for all y'all to bend that concrete mind just the right way.
Pretend you have a friend (we know you don't but let's pretend for a bit), and this friend is an awesome Prop Trader. This friend has a brand new 2019 Lambo... yeah sweet ay. He literally just bought it, had it delivered to his mansion on a truck, ZEROkms on the clock, but he just found out, a strip club in Europe has chartered a Jet for him to trade and live in Europe for exactly 1 year. He won't be able to enjoy cutting mad laps around Bondi beach in his brand new chick magnet. You, on the other hand, are a savvy Commsec, Hot Copper investor and you see an opportunity.
You say, "Hi, friend, I see you are going away for 12 months, can I rent or 'borrow' your Lambo while you are away?"
Friend says, "No worries man, just pay me a daily fee or "interest" into my bank account, let's call it an interest rate on the borrow and then just return the same make, model, year Lambo to me when I get back."
You wave goodbye to said imaginary friend as he boards the plane, race home and put the Lambo on the market, and some dickhead gives you full, brand new market value for it. He says he's a love heart on Hot Copper, so you give it to him for the full AUD$800,000. You now have $800k of cash in the bank and pay your friend the rate every day for a full year. The interest rate or borrow rate is 7%pa. so you have to pay him 7%pa. interest taken out every day.
One full year passes, and you see that hey, you need to return your imaginary friend's imaginary Lambo. You need a brand new 2019 Lambo and it's 2020 now! You quickly look at carsales.com and you see there is the exact same Lambo there for sale; a 2019 brand new, same make, model and year for sale. And whhhhaaaaat it's now only worth $500k. Your plan is coming together. You quickly purchase that Lambo, get it delivered to your friend's place and he is happy because you returned what was borrowed. You have returned his Lambo, and you now also have $300k in cash.
- Borrowed friend's Lambo at 7%pa. interest ($56,000pa)
- Sold Lambo for $800,000
- Re-bought Lambo 1 year later for $500k
- You now have $300k, less the interest rate of $56,000
- You have just made ~$244,000.
You call up your Hot Copper love heart friend and tell him about your sweet cash. He replies, "wow do I have a hot tip for you"! (lol)
Hope this explanation is a little more clear than mud. It was hard to keep it realistic, we all know Hot Copper people don't have any friends. (Lets hope they can take a joke as well).