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It’s the Wrong Time of Year for Shorts

At least in the northern hemisphere.

When I watched the film The Big Short last year, I doubted that it would help people gain real understanding of financial markets and the problems that caused the crash of 2008-9:

You might come out of this film with a better understanding of the events that led to the 2008 financial crisis — or you might not. More likely, I think, you’ll sort-of understand it while you’re watching, but be none the wiser when it’s all over.

I count myself very much in that none-the-wiser position, then and now. In particular, while I knew that the ‘short’ involved somehow betting that the price of a share would go down, it had never clicked with me exactly how the ‘short seller’ could make a profit.

Until today, when I saw this tweet, apropos of the members of a subreddit bringing a hedge fund to bankruptcy, by taking advantage of the fund’s short position. The tweet contains a screen grab of the written explanation, unfortunately, and the tweeter doesn’t know the originator of the text, but here it is:

The key step that I had never understood was the the short seller borrows the shares, and then sells them at the current price. If they drop in price, the seller buys them back and returns them to the original owner. I don’t think I ever realised that you could borrow shares. If you can own something, you can borrow or lend it, I guess, even if it’s imaginary, so it does make sense. If I had ever thought of it, I would have thought, well why would you borrow something that you can’t do anything with?

But you can do something with it: sell it.