Honestly the very basics. How does short selling actually work? How does leverage actually work? As someone who has never really gone into finance I’d love a LW sequence explaining what all the numbers actually mean.
One thing I’d really recommend to get started is to open a demo (or “paper”) account with a stockbroker. Get familiar with the mechanics of actually ordering trades with their software. Then you can experiment with what you’re learning. Don’t worry about blowing up your account, because it’s not real money. You can just reset it.
There are lots of apps for that. Search for “demo account” or something. The ones with a real stockbroker are going to be the most realistic, and will probably use real market data delayed by 15 minutes. My favorite trading application so far is the desktop version of thinkorswim (TD Ameritrade owns it at the moment, but Schwab might be buying them.) It’s scriptable and has some nice analysis tools.
Leverage is the ratio of the amount of the investment you control to the amount of money you need to control it. Buying the investment outright is 1x leverage.
Wise use of leverage is probably required for a good return. I talked about this a bit in How to Lose a Fair Game.
Leveraging up means you are increasing the ratio, which usually means you are borrowing money to buy investments.
The common way to do it is a margin account. You buy stock, and use the stock as collateral for a loan from your broker, which you use to buy more stock (not necessarily the same one). You can profit twice as much from a favorable move, but you also lose twice as much from an unfavorable one. That’s 2x leverage, you can use less. The broker also charges interest. The loan is fully collateralized, so if the shares you’re putting up lose value, you have to pay back the excess loan. This situation is called a “margin call”. You can also get leverage using options or buying shares in a fund that is itself leveraged in some way.
Leveraging down means the opposite, usually you keep some cash in reserve, and keep the ratio of cash to investment value balanced. For example, a portfolio of 50% cash and 50% stock has 0.5x leverage, assuming you keep it balanced as the value of the stock changes.
Short selling means that you borrow shares of stock to sell to someone else. You probably can’t do this in a basic account or a retirement account (with some minor exceptions). Your broker will find someone on your behalf. Some stocks are hard to borrow. Your broker might not be able to find enough of them.
You’re still on the hook for any dividends and have to compensate the original owner for any dividends they miss. Again, the broker should handle this automatically. If the market price falls, you can then cover your short position for less than you sold it for, which is a profit. The opposite case would be a loss. If you do have a margin account, your broker may also loan your shares to someone else to sell. Some brokers compensate you for this. If your shares are loaned out you still get the dividends, but they don’t count as dividends for tax purposes.
I see people throwing around words with numbers attached like “I shorted the stock at $x” or “I bought at 5x leverage, and I only vaguely know what the words mean and how they’re related to the numbers being thrown about.
Honestly the very basics. How does short selling actually work? How does leverage actually work? As someone who has never really gone into finance I’d love a LW sequence explaining what all the numbers actually mean.
One thing I’d really recommend to get started is to open a demo (or “paper”) account with a stockbroker. Get familiar with the mechanics of actually ordering trades with their software. Then you can experiment with what you’re learning. Don’t worry about blowing up your account, because it’s not real money. You can just reset it.
Hmm, is there an app for that?
There are lots of apps for that. Search for “demo account” or something. The ones with a real stockbroker are going to be the most realistic, and will probably use real market data delayed by 15 minutes. My favorite trading application so far is the desktop version of thinkorswim (TD Ameritrade owns it at the moment, but Schwab might be buying them.) It’s scriptable and has some nice analysis tools.
Leverage is the ratio of the amount of the investment you control to the amount of money you need to control it. Buying the investment outright is 1x leverage.
Wise use of leverage is probably required for a good return. I talked about this a bit in How to Lose a Fair Game.
Leveraging up means you are increasing the ratio, which usually means you are borrowing money to buy investments.
The common way to do it is a margin account. You buy stock, and use the stock as collateral for a loan from your broker, which you use to buy more stock (not necessarily the same one). You can profit twice as much from a favorable move, but you also lose twice as much from an unfavorable one. That’s 2x leverage, you can use less. The broker also charges interest. The loan is fully collateralized, so if the shares you’re putting up lose value, you have to pay back the excess loan. This situation is called a “margin call”. You can also get leverage using options or buying shares in a fund that is itself leveraged in some way.
Leveraging down means the opposite, usually you keep some cash in reserve, and keep the ratio of cash to investment value balanced. For example, a portfolio of 50% cash and 50% stock has 0.5x leverage, assuming you keep it balanced as the value of the stock changes.
Short selling means that you borrow shares of stock to sell to someone else. You probably can’t do this in a basic account or a retirement account (with some minor exceptions). Your broker will find someone on your behalf. Some stocks are hard to borrow. Your broker might not be able to find enough of them.
You’re still on the hook for any dividends and have to compensate the original owner for any dividends they miss. Again, the broker should handle this automatically. If the market price falls, you can then cover your short position for less than you sold it for, which is a profit. The opposite case would be a loss. If you do have a margin account, your broker may also loan your shares to someone else to sell. Some brokers compensate you for this. If your shares are loaned out you still get the dividends, but they don’t count as dividends for tax purposes.
What do you mean by “numbers”?
I see people throwing around words with numbers attached like “I shorted the stock at $x” or “I bought at 5x leverage, and I only vaguely know what the words mean and how they’re related to the numbers being thrown about.