Why is Tesla Selling Shorts? | Short Selling: Explained
Tesla recently launched its own satin "short shorts" in red, with a golden logo (you can buy it for ~$69.40 apiece). Why? Read on.
Musk (being Musk) had publicly ridiculed those who had shorted Tesla's stock.
Over the last few weeks, the stock has been rallying and hitting new highs (it has now become the most valuable automotive company in the world).
To mark Musk's triumph over those who betted against the company, Tesla launched the “short shorts.”
Bow, marketeers. Bow.
This brings us to today’s topic - short selling (not selling shorts, literally).
In the stock market, you can sell an asset before even purchasing it.
Yes, without owning an asset, you can sell it. Sell first, buy later!
Sounds interesting, doesn’t it?
Let us take an off-market example of this.
Rajat is a high-class, super successful nerd, and has no experience in buying vegetables from street vendors.
Shantanu, being a master negotiator and a baniya (businessman) at heart, sees this as an opportunity.
Shantanu to Rajat: “I will sell 10 kgs of potato to you at INR 15 per kg.”
Rajat: “But... you don’t have any potatoes!”
S: “Don’t you worry. Just tell me, deal or no deal?”
R: “Deal.”
Now, Shantanu goes to the sabzi-mandi and buys potato at INR 12 per kg. He hand delivers them to Rajat. Rajat is super happy and goes back with a smile.
In this transaction, Shantanu first sold the potato at INR 15 and then bought it later at INR 12, making a net profit of INR 3 per kg on the transaction.
A 25% return. Smooth.
Similarly, in the stock market, one can sell a share first at a higher price and buy the same later at a lower price. If you believe that the company has no future, you sell its ‘futures.’
Futures are make-believe instruments used for online betting on stocks. You can sell the futures of a company first and buy them later. You don’t ‘physically’ sell anything. It’s all on paper. Make-believe.
This piece was written by someone whose passion lies in making millennials financially literate (read: making finance fun). What we do is at the core of his being. A humble writer, mentor and dreamer. He Who Doesn't Want to Be Named.
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