How stock market investments work

On the stock market you can earn or lose money in many different ways. One of these ways is to invest by betting on the downside . Speculating that the price of a company will fall can earn (or lose) money. But, how can it be that , when the quotation of a company in stock market falls, it can make money? Now we will see a simple example that will help us understand how it is possible.

Steps to follow:

one

Suppose that an "A" person has 1000 Telefonica shares. Today these shares are trading at € 8 per share. Therefore, the total value is € 8, 000.

two

Another person "B" borrows the shares from the person "A", in exchange for paying an amount (for simplicity we will assume that "A" lends the money free of charge).

3

When the person "B" has the shares, he sells them. Therefore, he keeps € 8, 000 in liquid (money, cash, ...)

4

So, if the stock market falls, let's suppose that Telefonica shares fall to € 3 per share, person "B" buys the 1000 shares that "A" loaned and returns them (the cost is € 3 / share x 1000 shares) = € 3000)

5

Therefore, "B" has obtained a benefit of € 5, 000 (€ 8, 000 at the time of sale minus € 3000 when it returns the shares) without having owned those shares at any time.

6

Obviously, there is the option to lose money . If the stock rose to € 10 per share, when "B" returned the 1000 shares to "A" it would lose € 2000 (€ 8, 000 at the time of sale minus € 10, 000 when it returns the shares).

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