What is short betting?

Question

Jon Stewart interviewed Alan Greenspan recently, and Stewart asked about this detached reality of hedge funds and short betting in the stock market. What exactly is short betting?

Answer 1

Remember: Everyone's goal is to buy low and sell high. However, what most people don't realize is that you can do the buying and selling in whichever order you like. Although most people buy first, you also have the option of selling first. Your goals remain the same...buy low, sell high. But when you sell first, you are still hoping to buy lower...just in a different order. It is called "short selling" because you are "short" the security...ie, you don't own it. You essentially borrow it for the time you are short it, and pay it back when you purchase it in the market.

Answer 2

It is usually referred to as Short Selling. It is a way to make money when the market goes down. Here is how it works:

1. Your broker borrows shares from a different client and lends them to you.
2. You sell the shares that you borrowed. The funds are held in your brokerage account.
3. Later, you buy shares of this stock. You profit if you can buy at a lower cost.
4. You then replace the shares that you borrowed with the shares that you just bought.

If the price of the shares you sold goes way up, the brokerage may ask you to deposit more funds in your account (this is a Margin Call). This ensures that you won't default on your obligation to replace the shares later. If the company pays a dividend, you are responsible for making a dividend payment to the person who owns the shares that you borrowed.

Hedge funds do this on a much larger scape -- but the principal is the same.

Answer 3

Short betting most likely means short selling. This is when you sell a security/option etc without first actually owning the security/option. You then need to close the position by actually buying the security/option.

Therefore by selling short, you stand to win when the price of the security you sold falls following you selling it. However you stand to lose when the price of the security rises above the price you sold it.

Cheers

Jon