Shorting Things

You predict (or have insider information) that the price of lawnmowers will fall. The current market price of a lawnmower is $1,000. You go to Eddie’s Lawnmower Rental Company and rent a lawnmower from Eddie for $10 a day. He doesn’t care about you returning the same lawnmower; he just wants you to return a lawnmower (assume that all lawnmowers involved in this story are in great working condition).

You sell this lawnmower to your neighbour for $1,000.

Ten days later, and as you predicted, the price of lawnmowers falls to $500. Now you buy another lawnmower for $500 and return a lawnmower to Eddie. So now you have gained: $1,000 - ($10 x 10 days = $100) - ($500 on the lawnmower you bought) = $400.

Now say you made a bad prediction and the price of lawnmowers went up to $1,500. So now you have lost $1,000 - ($10 x 10 days = $100) - ($1,500 on the lawnmower you bought) = $600.

Theoretically, there is no bottom to your losses. So you have to be very careful when you short things. It’s not for everyone. Stick to Index Funds if you don’t understand what you’re doing.

Finally, here’s some discussion on where the expression ‘going short’ may have come from.