understanding short selling, again

here is another example

to understand short selling!

a rich man

puts his 100 abc shares

in the locker

locks it

gives the keys to his servant

and takes the next flight

to germany

for a vacation of 1 month.



while he is away

his servant

who had fair bit of knowledge

of shares

realised from his chart reading

that the abc share

is going to drop

from current 2,000

to 1,000

in 1month!



he has the key

and has the guts!



he picks the key

opens the locker

picks the 100 abc shares

sells them for 100x2,000=2,00,000

keeps the account

waits for 1 month

sees the share price

drop from 2,000 to 1,000

then buys back

100 shares

for 100 x 1,000=1,00,000 bucks out of 2,00,000 he is having

puts them back in the locker

hands over the keys

to his master who returns the next morning.



the master is happy to find the 100 shares intact!

and the servant has made cool 1,00,000

by using the

stagnant shares

for encashing an opportunity!

that's short selling or shorting!

--

now, lets see the other side of the trade!

this time

the rich man

doesn't have abc shares

but cash!

he puts in

1,00,000 bucks

in the locker

locks it

gives the keys to his servant

and takes the next flight

to germany

for a vacation of 1 month.



while he is away

his servant

realises from his chart reading

that the abc share

is going to rise

from current 1,000

to 2,000

in 1month!



he has the key

and has the guts!



he picks the key

opens the locker

picks 1,00,000 bucks

buys 1,00,000/1,000 = 100 shares of abc

waits for 1 month

sees the share price

rise from 1,000 to 2,000

then sells back

100 shares

for 100 x 2,000=2,00,000 bucks

keeps 1,00,000 for himself

and puts the 1,00,000

back in the locker

hands over the keys

to his master who returns the next morning.


the master is happy to find 1,00,000 bucks intact!

and the servant has made cool 1,00,000

by using the

stagnant money

for encashing an opportunity!

--

in the above example

it is assumed

that the servant had the master's permission

to use his valuables

with the sole condition

that the servant will return

the money or the shares

when the master asks for it

or

on the date of his return

whichever is earlier

irrespective

of whether

the servant is making money or losing money

by that time!