people are talking about some kind of thing with gamestop being shorted and this causing hedge funds to lose money that doesn't exist
can someone explain what these words mean to people who don't know capitalism words
-F
@Felthry Possibly. Do you know what shorting is? And what hedge funds are?
@Felthry OK. So. Take an investment (stock, bond, commodity, whatever). It has a price. If you think the price is going up, you'll buy shares figuring that you can sell it later, at a higher price. This is called going long in the investment and what everyone thinks finance is about.
But. If you think the price is going down? You can sell a share, for delivery sometime later, trusting that you can buy a share before delivery is due. This is called shorting the investment.
@Felthry So, the risk of shorting is you have to buy the share before the due date. If the share does drop, you're good. But if it doesn't drop? You have to buy at whatever the price *is*.
Someone would buy the share for delivery-later because they figure the price is rising and want to lock it the price you're selling. Or they need the share for their own obligations.
@Felthry Besides buying and selling, though, you can also buy options, the right to buy or sell at a particular price for a particular while. Most of these don't get used, so, they're cheaper than buying or selling the original share.
@Austin_Dern that helps yes
-F
@Felthry OK. So that's the underlying market nonsense. You go long if you figure a price is rising; you go short if you figure a price is falling. You buy an option if you want to buy or sell at the current price for a short while whatever the market does.
@Austin_Dern where do the words long and short come from here?
-F
@Felthry I'm not sure etymologists are agreed. My understanding is the idea of 'short' was that someone doing this owed their broker (specifically owed the shares they'd already sold). Short as in lacking. Then 'long' followed as being in the reverse position. But I don't know how confident etymologists are in all that.
@Austin_Dern Hm. Well, anyway, what's a hedge fund? We're not familiar with that either. Is that when you hide your money in a shrubbery?
-F
@Felthry Closer than you'd think! It's hedge as in 'hedge your bets'. Suppose you short a share, and are wrong, and the price goes up a *lot*. Then you lose your whole investment plus maybe more.
So, why not hedge your losses? Short the share, but buy the option so that, worst comes to worst, you can buy the share at the current price. If the price drops, fine, the cost of the option was wasted, but the option is relatively cheap. If the price rises, the option saved you.
@Felthry So, does all that hang together reasonably? (There's several hundred kajillion complications to this, but this is the basics and as much as you need for the rough picture.)
@Austin_Dern aa sorry i fell asleep
-F
@Felthry Not to worry! It was lucky timing, really; I had something RL pulling me away and it was getting hard to focus on both at the same time.
Also you never need to apologize for sleeping; it's the highest-priority thing there is besides medical care and using the bathroom.
@Felthry Like, if you're deciding whether to buy a Playstation 5, and I have one I'm looking to sell? And you give me five bucks not to sell it to someone else before Saturday when you're done making up your mind? That's buying an option on my Playstation 5. You aren't committing to buying it, but you are buying the right to buy it before Saturday. Does that help any?