The Finatical
Week of March 15th, 2022 - Shorting a Stock, The Impact of Mobile Banking, The Rise of Neobrokers
Topic Breakdown - Learn about Shorting a Stock
Short selling is an important factor in the establishment of stock prices and regulation of the market. When successful, shorting a stock can allow investors to gain a significant profit, especially in the short term. Still, there are also problems with this method. If you don’t know what the term short selling means, don’t worry, because we will be learning about short selling, or shorting, in this article. First, we will be introduced to the meaning of short selling through an example, then we will analyze some basic math that further explains the concept, and finally, we will go over the problems and limitations of using this method.
Short Selling—An Example
Put simply, short selling is a way to bet or speculate that the price of a stock will go down. Although it sounds simple, this concept can actually get very complicated. Before we tackle a deeper explanation, it is important to understand that just like traditional loans where you can borrow money, you can also borrow stocks from your brokerage (this is a key aspect of short selling.) The best way to grasp the idea of short selling is through an example like the following: Tom predicts that Tesla stock is overvalued and is likely to go down. He would then borrow – not buy – a share of Tesla stock from his brokerage, and would immediately sell it for its current value of $800. Tom is right, and the stock falls to $700 in the next week. He would then buy the stock himself for $700, giving the stock back to the broker. This means that Tom is left with a profit of $100 for himself.
The Math
Essentially, you borrow a stock that you don’t own when the price is high, immediately sell it for that high price, buy the stock yourself when the price goes down, then give it back to the brokerage, keeping the difference. This works out because you only have to pay the brokerage back for the current value of the stock, which allows investors to borrow a stock worth $100, for example, and give that same stock back later when it's worth $70, keeping the $30 for themselves. Still don’t get it? Here’s the math in an example of short selling:
Initial balance | $0 total balance.
Borrow stock | $0 + $100 worth stock.
Sell stock | $100 total balance.
Buy stock after it goes down and is worth $70 | $100 - $70 worth stock.
Give stock back to broker | $30 total balance.
As you can see, you started off with $0 and made a profit of $30 because the stock was valued at less when you gave it back to the brokerage.
Problems and Limitations
Unfortunately, there are also some problems and limitations of shorting a stock. Firstly, you have the potential to lose an unlimited amount of money. This is because you are profiting from a stock decreasing in value, and losing money when it goes up. When a stock price goes down, it can only go down to $0, but when it goes up, it can theoretically keep increasing in value forever, causing a short seller to continue to lose money. Another drawback of short selling is that there is no way to know for sure that a stock price will go down. This is also true when hoping that a stock will increase in price, but according to investopedia.com, the S&P 500 index has returned a historic annualized average return of around 10.5% since its 1957 inception through 2021”, making long term investing less risky than short selling. Another issue with short selling is that you will still be charged fees by the broker that you borrow the stock from, taking away from your profit. Along with this, you will have to return the stock in a certain amount of time, sometimes not enough for the stock to go down. The most significant problem with this method is that it is risky, more so than the majority of other ways to invest. There is potential to lose large quantities of money in a short period of time, making short selling a bad idea for investors who lack experience.
In conclusion, short selling may seem like a brilliant way to make money even when stock prices go down. When done correctly, it is true that there is the potential for considerable profits. Despite this, shorting a stock is a bad idea for the majority of investors due to its large risk and the possibility of unlimited losses. Short selling should only be done by those with much experience, as well as enough money to make up for large, unexpected losses.
Financial Trends
The Impact of Mobile Banking in the Banking Sector
It is clear that mobile banking is through the use of smartphones for accessing online banking services. Currently, there are reportedly 57 million users using mobile banking. According to a report by CAIC, mobile banking will become the largest channel for accessing financial services in the near future. The reports also projected the number of smartphone users to go from 41% in 2021 to 71% in 2024, nearly 30 percent! However, the surprising news is that the usage of mobile banking is increasing more in Asian countries than it is in western countries.
Due to the increase in demand for mobile banking and applications that support mobile banking, there are a number of companies that have started to offer consumers software-based solutions. The voluntary changes that mobile banking has created in the banking sector consist of operational cost, 24/7 services, efficiency and less error, and customer experience. Since banks have started to use mobile banking applications to provide their financial services online, it has resulted in their operation costs being reduced. The most important goal for banks is to provide their services to their clients all the time and generate a profit out of it. The use of online banking has also proven to make banks efficient as a whole bank. In the standard banking system, it was hard for banks to always accommodate the needs of their customers, but now with online banking, banks are able to assist their clients at all times.
The Rise of Neobrokers
Neobrokers are digital financial services that make trading and investing accessible for a larger consumer database. We are currently living in a market where retail investors lose up to a quarter of their gross returns just in market fees. Hence, investors are looking for a more cost-effective way to enter the market. Neobrokers are driven by mobile technology, stimulus money, and the rise of social investing. It has recently seen a surge in its users in the past two years, and a German Neobroker raised more than $180 million for Scalable Capital in a Series E funding round.
As with a lot of new technological advancements in the finance and banking industry, we see that they’ll have a different approach from the traditional banking system, however, Neobrokers are composed to do trading to what Neobanks are doing to traditional banking. One of the things that make Neobrokers unique, is the fee structure they have set in place for their consumers. As mentioned before, individual retail investors have been excluded from certain investment opportunities, due to the high prices that they have to pay in order to capitalize on an investment. However, Neobrokers eliminate these fees altogether, allowing individual retail investors to capitalize on each investment opportunity. Overall, Neobrokers offer their consumers fewer services and trading venues for executing trade orders than traditional brokerages. Still, the increase in the number of Neobrokers leads to chances of consumers gaining access to a variety of investment classes, like, crypto stocks, ETFs, gold, etc.
Financial Guidance
"You get recessions, you have stock market declines. If you don't understand what's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch
What you have to understand about the economy is that it follows a cycle, consisting of recessions, troughs, expansion, and peaks. To be able to profit, you have to understand when the economy is in recession and predict when it will expand.
Money Fact
It costs 1.7 cents to create a penny. It’s interesting to think that the production of pennies creates a deficit for the US government.