Question about possibility of making profit on the decreasing value of an item.

Discussion in 'Stock Market Education' started by SilvioMaF, Jun 25, 2014.

  1. SilvioMaF

    SilvioMaF Member

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    This question is the result of a conversation a bunch of us had over the weekend.
    The best explanation is a scenario: Let's pretend that you know for a fact that gold is going to depreciate (??)... go down in price. For example, it sells for $1000/oz now, but you have insider secrets that tells you the price will be $500/oz in 6 mos. No question - it's a fact. Let's pretend your old buddy just found a huge pocket of gold and he's gonna flood the market. (just play along here....)
    You - the financial genius that you are - know this and use this knowledge to buy other items that make you hyper rich as a direct result of gold going DOWN in value.
    Problem is: how does that actually work? I get that if you invested $1M into gold and you sold it before the price crashed that you actually SAVED money using your secret insight. But this is preserving money you already had.
    But based on what some of us either heard directly and/or was inferred... it appears that something else is actually possible. To invest in the opposite item and see THAT price go up as a direct result of Gold's decreasing value.
    For example: you know gold is going to plummet.... so you take your life's savings and you load up on silver. Gold drops and silver gains. Yay! You've made tons of money!
    That's the crux of the confusion. It appears that some of us believe there is a way to directly earn profits (not just preserve value) in the market by buying the opposing item of Gold. And others feel that no- you just preserved value by avoiding the future-depreciating-item.
    We are all at odds on this, and I thought I'd toss this NOOB question out for explanation.
    Is it possible to make a profit on something else with the knowledge of something decreasing n value? If so, how is that actually done? In my basic example... why would silver go up because gold went down? Also - what is the 'opposite' of ore? Is it another ore item? or something wildly random - like pork bellies.
    Or is there a general confusion about what is happening - and you are really PRESERVING your investment more than profiting? So you had 1M to start, and managed to keep your 1M while everyone around you lost 50% of their investments?
    I would really like to understand this concept better. Also; there may be a bet on the matter.
     
    Last edited by a moderator: Jul 8, 2016
  2. turt

    turt Guest

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    There are many ways to do this. There are actual funds that go up as a commodity goes down. On the stock market, it's commonly done by shorting. Basically, you sell someone else's shares and pay interest/small fee with the guarantee that you'll buy the shares back at a later date.

    So let's say gold is $1500 and you sell it for $1500 now. You have to buy back those shares within 6 months. In 6 months, the price goes down to $1000. You already sold the gold for $1500 and now you can buy it for $1000. So you just made $500 - fees/interest! Of course, if the price rises, you lose...
     
  3. JR Ewing

    JR Ewing Super Moderator Staff Member

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    Yeah, I'd say it's not the best idea to buy "Y" just because you're convinced "X" is going down. Things often move in tandem with one another. Shorting "X" would be the better option, but that also carries risk, since we can never be 100% sure something will go down. And if it goes up big, you can be wiped out. Use caution. I tend to hedge short positions or use put options.
     
  4. richc3

    richc3 Senior Investor

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    Shorting can be rather popular and the people involved in it are often perceived quite negatively. Or at least the vocal few on stock-related sites communities as they often try to cast more seeds of doubt through seemingly toxic behavior. That said, I've seen people make small fortunes doing it on companies like BlackBerry and alike. Conversely, I've seen people lose a lot from unforeseeable rises -- typically a stock or commodity worth shorting often has low expectations at it is and a momentary pleasant surprise can send it through the roof.
     
  5. JR Ewing

    JR Ewing Super Moderator Staff Member

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    Many smart people went broke shorting tech stocks back before the tech bubble popped. Put options are much safer.
     
  6. firelily99

    firelily99 Well-Known Member

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    I have friends that went down financially due to shorting and they do regret it. They are in the process of building back up and they are doing it in a safer and more thoughtful manner.
     

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