With the recent popularity of movies and capital market shows and (often) unsavory creatures living in these fierce commercial arenas, viewers who are unaware of the esoteric jargon used by financial professionals can become confused. while watching shows such as Showtime Billion's hit series. For those of you who are unfamiliar, the show traces the daily activities of billionaire hedge funders, Bobby Axelrod (Damian Lewis) – Founder and Managing Partner of the Hedge Fund, Ax Capital, LP, ruthless and aptly named.
After watching the show for the second season, I noticed that screenwriters do not hesitate to use technical terms that the average viewer may not understand completely. For example, I've often heard characters in the series talk about "shorting a stock". The Big Short, a recent film of the same genre as Billions, actually devotes a few seconds to let the beautiful Margot Robbie (The Wolf of Wall Street) explain the short circuit as being "bet against a title" – which is technically correct, although incomplete.
What is a "short position"?
An investor can take two different positions when he speculates on a stock – Long and Short. "Going Long", as it is called, is the most common (and most conservative) of the two. To take a long position, investors who believe that the share price will rise ("bullish investors") buy shares with the intention of reselling them at a higher price in order to earn profits in the form of capital gains. "Shorting" a stock, however, is a bit more complicated.
To "sell" a stock, an investor who thinks the price will go down ("bearish investors") must first borrow the stock of a current shareholder. The shareholder (who has a "long position" in the stock) lends x number of shares to the bearish investor who immediately sells the shares borrowed on the stock market. If the bearish investor is right and the stock price goes down, he can buy back the same stock at a lower price to pay back the lender. The difference between the price received and the price paid by the borrower is the amount of the gain realized. So for an investor to win on a short position, the other party (the lender) must lose, and vice versa.
Most investors are more reluctant to take a short position on a security because of unlimited exposure to risk. If the bearish investor is wrong and the price of the stock rises, there is no limit to the price increase. However, the risk associated with long positions is limited only to the downside potential of the stock price, which can only go down to zero.
Inventory reduction is considered by many to be a ruthless practice by sophisticated risk-averse investors seeking primarily to maximize returns using all available means. After all, investors who have short stocks have a financial interest in the bankruptcy of a company that can employ hundreds, if not thousands, of people. Conversely, inventory reduction can also have a positive effect on markets by keeping prices at a reasonable level by limiting buyers' optimistic sentiment.
This article is for informational purposes only and does not advocate the use of stock trading techniques, such as shorting stocks. The understanding of what is or is not appropriate for you should be determined in consultation with your investment advisor, your tax specialists and possibly your lawyer.