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Last week Volkswagen stock took one of its biggest hits in company history, dropping more than $160 per share within the past 6 months. Amateur investors would think, "How am I supposed to look at this as an investing opportunity, they are losing money!" That is what today's lesson is about, shorting stocks.
In the rare case like Volkswagen, where a stock continuously drops, investors have the option to short Volkswagen stock. What does shorting a stock mean? Shorting a stock is when someone sells a stock in advance of acquiring them, with the aim of making a profit when the price falls. Here's how shorting works, let's say I had 100 shares of Volkswagen stock for $200 before the price fell. Once Volkswagen's price starts to decline, other investors or traders take my stock in Volkswagen and sell it before the price goes down. Once it does go down, to $100 for example, the investor that sold my stock rebuys it for $100 dollars per share and gives the stocks he borrowed back to me; but as he gives me back the shares that he borrowed, the investor keeps the $100 in difference he made from buying the stock at a cheaper price.
This ment that Volkswagen was a gold mine, their stock had been dropping for along time in their history, but this was one of the biggest drops it had seen in the companies history. This allowed for investors to continually short Volkswagen stock for massive profits.
This post was very insightful on how one could manage their money on the stock market and take advantage of dropping stocks such as VW's
ReplyDeleteI found the topic to be quite interesting because i have been a little more interested in investment and stocks. I did find shorting stocks a bit confusing. I was wondering if maybe giving a more detailed example would help. I'm new to the whole idea of stocks and i didn't know stocks could be borrowed. I think it would helpful if you explained borrowing and other basic concepts on investing a little more.
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