Short Selling Explained To a 5 Year Old (Example)

First, let me cover what both a long position is and what a short position is so you can see how stupid the latter is.

Long Position

Buy today, sell in the future when price goes up. Simple enough, this makes sense.

Short Selling

Sell high, buy low. Huh?

Let me explain in a simple, easy to understand example using apples.

Apples are currently $10 at your market.

You pay .30 cent to borrow an apple and then sell that apple to someone else for $10, the market rate.

You now have $9.70.

This is not your profit yet because you simply borrowed an apple which you then sold, so now you have no apple. You need to take your $9.70 and go buy another apple so you can return an apple to the original vendor.

Since you borrowed the apple, you have to return the apple to the vendor. The price of apples though has now fallen to $5 because there was a big shipment of apples from abroad which crashed the price.

So you are able to return an apple by buying a new apple for $5. Remember, you have to return the item you borrowed, regardless of price.

$9.70 - $5 = $4.70, which is your profit.

What if the price rises?

If the price rises, you still have to return the apple that you borrowed. Since you sold the apple you borrowed, you need to buy an apple at whatever the price is in order to return an apple to the original vendor.

It's your problem if apples are now $15 instead of $10.

As you can see, there is limited profit potential but unlimited risk to cover your short if your bet gores wrong.

Short selling is stupid

Sell something you never owned. Imagine if you could do this with other assets?

Can I rent an apartment that I then turn around and sell?

Buy Bitcoin and opt out of this nonsesne.