Can someone explain to me (like I'm 5 years old) what "shorting the market" means?

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To a five year old? It means you are betting on the market going down.

In gross over-generalizations to a college graduate? I borrow a new car from a car lot and immediately sell it for list value (say $30,000). Then a month later I buy the same-ish car on auto trader for $15,000 and return the borrowed car.

I've now made $15K

Selling your friends bike, but promising to buy it back in future. You get the cash up front, but if that bike goes up in value you lose money when you buy it back. Otherwise, if that bike goes down in value, you buy it back cheaper than when you sold, and profit the difference.

The common question is how can you sell something you don't own?

If other investors own stock on margin, then their broker is able to lend their shares to you to sell (short), and you will be obligated to buy back to cover in future. That broker's investor never knows their shares were lent out. If there isnt a big enough supply of shares to borrow for shorting, then you can't short. Usually there are plenty of shares to short. In theory, if the entire amount of outstanding shares of a company are held in non-margin cash accounts, then it can not be shorted. An investor holding shares in cash, can't have them borrowed. There is naked shorting that exists, but not suitable for 5 yr old intro.

If you are not out right shorting stock per above, you can buy put options or buy inverse ETFs to effectively bet against the market in a "short position", although you are technically "long" buying low and selling high to profit on market downturn. You call sell short call options to profit from downside, but option strategy is different depending if you are in the money, out of the money, and underlying stock positions.

Thank y'all for the replies. Yes, I asked "like I'm 5", because a friend tried to explain it to me, but I did not understand. Now, I believe that what he explained to me was leveraged debt.

Good visual version of shorting a stock (but then lose money when the price rises afterwards, haha)

You are a pimp and have 5 girls....



I forget the rest.

Buying back when it's lower: how does that help you make money? Are you banking on the price going back up as well?

Nm, pear explained it in more detail.

You pay interest for the margin account and trade commissions.

Let's say you have no shares of MSFT. You go onto your account and you sell 100 shares. You are now short MSFT shares. If the stock goes up you are losing money. If you think its going to continue going up you buy 100 shares, which takes you to zero shares.

However, some stocks have difficulty finding shares to lend for shorting. You also can have fees associated with certain stocks, making them a higher price to hold as a short. I prefer using Puts in most cases because you avoid the fees and also if you're wrong you are only risking the premium paid for the option. I like to start with a Put on a stock I think is way ahead of itself. TSLA is my favorite. Over $900 and people were talking $2000 on the way. I bought a $850 Put out 30 days and the stock had dropped to $825 so I could sell the Put option and bank the money or do what I did before and this time - you execute the Put which is a right to sell the stock at $850. Only I had no shares to sell at $850 which means I was at -1000 shares of TSLA for my 10 Puts.

The stock sank to $815 the Monday after converting the Put to a short at $850. It gets a little complicated here because the actual value of my short was $834. Why because the Put option premium to enter the options was $16. Confused? Then head over to a site like TastyTrade.com and start studying it.

Good luck!

You could also buy index funds that essentially short the market.

If you don't know, you should probably not do it right now.

Buy puts, sell calls, sell call credit spreads to define risk (vs. selling calls)

Thank you all for the replies. I've dabbled in penny stocks before, but I am nowhere near educated enough with investing to try to "short the market" right now. I'd just heard the term before, and was curious. I am very interested in learning more about investing.

SidetrackAg said:

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Thank you all for the replies. I've dabbled in penny stocks before, but I am nowhere near educated enough with investing to try to "short the market" right now. I'd just heard the term before, and was curious. I am very interested in learning more about investing.

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Follow the stock markets thread and read about what oldarmy and others suggest. Great leaning. As OA1 says focus on understanding buying and selling calls/puts instead of "shorting".