The way to make money in the stock market

In the 2006 James Bond movie “Casino Royale” an international banker for dictators and terrorists plans to make a lot of money by “shorting” the stock of an airline company.

The bad guy, Le Chiffre, plans to do this by having one of his henchmen blow up a prototype for a large jetliner for a fictional airline named Skyfleet.

In the story, the airline company stock had been rising because the company would have been able to fly more people cheaper with this plane.

The destruction of the prototype would have sent the price of that company’s stock dropping like a rock and the villain would have made millions of dollars.

So of course the hero of the movie saves the plane from destruction and the stock does not go down in value, but the story line of the movie is set up.

While most people don’t understand how stock is “shorted,” they understand it must not be a good thing. The subject of “shorting stock” has recently come to the public attention with failed effort to “short” the stock of Game Stop.

My last job before retirement was as chief of staff of the Arkansas State Treasurer so I know a little about investments and the stock market.

Here is a simple answer on what “shorting” entails:

Most people consider the way to make money in the stock market is buying low and then selling high. There is a reverse way to make money on investments -– selling high and then buying low.

Unless you have insider information or enough stock to dump on the market and make the price go down, that is a risky strategy.

People who want to “short” a stock “borrow” shares of the stock from a broker who owns it. There is a fee for that so the broker makes money.

Let’s say the stock is selling for $ 100 a share. The person doing the shorting then sells the stock. However, that person is obligated to return the borrowed stock at some point in the future.

If before the return date the overvalued stock declines in value — to say $ 75 per share — the borrower buys the stock back at the new lower price and returns it to the broker.

The broker has the same stock back in his investment firm’s portfolio and has earned a nice fee for the loan.

The borrower has sold the stock for $ 100 and bought it back for $ 75. This means a profit of $ 25 a share. If the person shorting the stock borrowed $ 100,000 or $ 1 million in that stock, this provides a nice profit.

The downside to this is that if the stock increases in price to say $ 125 per share, the person shorting the stock loses a lot of money.

This legal, but ethically questionable form of stock trading allows Wall Street elites to make a lot of money. It also rewards people with insider information and the ability to manipulate stock prices.

This house- of- cards financial trick is blamed for being one of the reasons for the 2008 stock market melt down.

Still, those with insider knowledge don’t have to short stock to make millions of dollars. They can just buy it at a low price and later sell it at a high price — just as long as they know what is coming.

Take for example House Speaker Nancy Pelosi’s January periodic transaction report.

Members of Congress are required to submit the report every time they or their family members conduct any “purchase, sale, or exchange of stocks, bonds, commodity futures, and other forms of securities,” of transaction amounts exceeding $ 1,000.

In her January periodic transaction report, Pelosi disclosed that her husband, Paul Pelosi, had invested between $ 500,000 and $ 1 million in Tesla stock options.

The report requires reporting in vague categories — in this case between half a million and a million dollars.

This deal for Tesla stock came within a month of Joe Biden announcing he plans to make the estimated 645,000 vehicles in the federal automobile fleet all electric vehicles.

What does Tesla make? Electric vehicles. That means the Tesla stock will tremendously increase in value.

Defenders of the House Speaker immediately began a campaign to convince people she did not benefit from advanced knowledge of the Biden announcement because she didn’t make the transaction — wink, wink — her husband did.

That’s the old fashion way to make money in the stock market.