This thread is really interesting but I think gets a bit deep in parts, I would love to understand it more, I have to be honest it is above my head at the moment. I am reading every single post though as there are some financially savvy people on here.
Ask anything you like.
The one which gasts people flabber is "shorting".
A
Long position is the "normal" one. You buy a stock, and sell it again if the price goes up. Rolls Royce, say.
Things aren't quite like they used to be.
Nobody rushes round with a piece of paper, it's just a bit of data.
There are many players betwen you and RR. - Platform, broker, Gateway, Market Maker etc I read about it all but have forgotten.
Same as if you "buy" gold, or Helium, you don't get a bit of metal or a balloon.
So, it's all "accounts".
The Leveraged stock for example is where you buy a thing, (the general name for anything you buy on a SM is "instrument", or "name" for short.)
You buy a representation of something.
If it's a
3x stock, like LRR (Long Rolls Royce) the price moves three times as much as the RR price does, by %.
You pay 100, RR goes up by 1%, you get $3 profit. If RR drops 34%, you lost the lot.
The Fund holder is providing an Instrument which Looks like a share, that you're buying. He fiddles with Derivatives like those "Options" I mentioned, so he can deal with something which behaves like a multiple of RR.
So it's all smoke and mirrors. What YOU get, LOOKS like a bit of RR, OR a magnified bit of RR. But Sorry no turbine blade with your name on it.
There are tiny profits in there, so the Market Maker and other intermediaries make a turn.
Platforms like Trading 212 are UNCLEAR in lots of ways they work, effectively diddling you at every stage, but it's usually too small to see clearly.
Some platforms are honest and will tell you (eg Pepperstone), some aren't and don't, like Trading 212. If you like, Pepperstone charge you a fee, Trading212 implies and hides from you and pretends to be working for nothing. They use
accepted methods so it's all PERFECTLY legal, but a PITA.
OK
SHORTING uses a similar intermediate layer, though it's totally different - it LOOKS LIKE a minus 1x stock.
It's just a number on a screen.
The way you
think of it can be like this:
The stock price is $100.
You think it's going to drop
You
Borrow a share. So you
owe them 1 share.
You
Sell the share, and
get $100.
Then if you're right, the share price drops, say to $90.
So you use your money to
Buy 1 share, at $90, and hand it back.
You keep the $10.
(If the share price goes UP t0 $310, you lose $210)
They cover their costs either directly - per transaction, or in the "spread", which should be tiny, the difference between the buying and selling price.
------
Now,
Margin.
This is a different arrangement of "multiplying " the price change. There are 3 (that I know of) ways that's done.
The simplest one works like this:
You want to use your $100 to buy RR.
But RR will only move maybe 1% max, in a day, so it's not interesting. You simply don't have the $20,000 to make the possible gain of $200. (1% of 20,000)
So you PAY to borrow the money, simples.
Your Margin is the $100
They charge you a sensible rate - more than base rate, maybe 10% per annum. There are limits and minima you agree to work within.
So you buy at 2x, or 3x, 30x, whatever, and the longer you hold the position, the more interest you pay on the loan.
They don't LET you work outside the limits, and if the instrument price moves such that the limits are hit, you get a Margin Call where they ask for more funds. If you can't pay they close the position - you lose.
See?
"Decent brokers" lending rate works out to something like 10% p.a.
With T212 you see this:
(Decent brokers pay
you on a Short position overnight, Trading212 don't)
Long , 1.000694 ^365 is 28.8% p.a - like you're using a credit card.
Does that help or have I muddied the slurry too much?
