Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America Highlight

Here’s how shorting works. Say you’re a hedge fund and you think the stock of a certain company—let’s call it International Pimple—is going to decline in value. How do you make money off that knowledge? First, you call up a securities lender, someone like, say, Win Neuger, and ask if he has any stock in International Pimple. He says he does, as much as you want. You then borrow a thousand shares of International Pimple from Neuger, which let’s say is trading at 10 that day. So that’s $10,000 worth of stock. Now, in order to “borrow” those shares from Neuger, you have to give him collateral for those shares in the form of cash. For his trouble, you have to pay him a slight markup, usually 1–2 percent of the real value. So perhaps instead of sending $10,000 to Neuger, you send him $10,200. Now you take those thousand shares of International Pimple, you go out onto the market, and you sell them. Now you’ve got $10,000 in cash again. Then, you wait for the stock to decline in value. So let’s say a month later, International Pimple is now trading not at 10 but at 7½. You then go out and buy a thousand shares in the company for $7,500. Then you go back to Win Neuger and return his borrowed shares to him; he returns your $10,000 and takes the stock back. You’ve now made $2,500 on the decline in value of International Pimple, less the $200 fee that Neuger keeps. That’s how short selling works,