What is ‘shorting’ the market?
Trading the markets: What is long and short trading?
Trading on a market can be said to be similar to gambling. How? Trading is heavily focused on predictions. When you put down 10 pounds at a bookmaker on a horse, a football team or a tennis player, you are making a prediction on the success or failure of these in any given arena, whether it be a race, individual game or tournament. In the stock market, you are similarly predicting whether a business will perform well or badly over a certain length of time and knowing when to short the market can be a big advantage.
Within the stock market, trades can be broken down into long and short trades. In simple terms,
The Bear and Bull in front of Frankfurt’s stock exchange – symbolizing the opposite extremes of market movements
How to short the market?
Short selling is the borrowing and selling of a stock, with the hope of buying it back later at a cheaper price. A trader, acting on behalf of themselves, a company or a client,
Let’s use the example of a business and call it Company A. Let’s say Company A’s share price was on the market at $50 a share, but perhaps you see a scandal involving management on the horizon that might reduce the price. You estimate they will drop to $40 a share. You (or the broker) sell the shares borrowed at the market price, (
Show me a real-world example
The Big Short – Michael Lewis’s book on the subprime crisis became a Box Office success
The author Michael Lewis explained the subprime crisis in his book ‘The Big Short: Inside the Doomsday Machine’, which was subsequently made into a film starring Ryan Gosling, Christian Bale, Brad Pitt, Steve Carell and others, as the ‘outsiders’ (based on real people) who saw the crisis coming.
They predicted that the market was heading for a fall which is when you should short the market, which is exactly what short trading involves, hence the film’s title. Barely any investors understood the extent of the
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