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Fri Jan 29, 2021, 11:27 PM

I know little-to-nothing about stock trading. Can someone please give me the "Dummie's" version of

what happened this week with the GameStop situation?

I know the basics --- stocks are bought and sold. What I don't understand is how stocks can be "bet against".

Thanks in advance!

43 replies, 1722 views

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Reply I know little-to-nothing about stock trading. Can someone please give me the "Dummie's" version of (Original post)
Progressive Jones Jan 2021 OP
Yavin4 Jan 2021 #1
cate94 Jan 2021 #2
PoindexterOglethorpe Jan 2021 #3
Vivienne235729 Jan 2021 #4
uncle ray Jan 2021 #17
Vivienne235729 Jan 2021 #30
fishwax Jan 2021 #6
A HERETIC I AM Jan 2021 #8
Yavin4 Jan 2021 #19
smirkymonkey Jan 2021 #20
A HERETIC I AM Jan 2021 #38
AmyStrange Jan 2021 #23
Progressive Jones Jan 2021 #9
Yavin4 Jan 2021 #18
ADK Jan 2021 #33
jmowreader Jan 2021 #15
LAS14 Jan 2021 #26
TlalocW Jan 2021 #5
AmyStrange Jan 2021 #24
PersianStar Jan 2021 #7
PurgedVoter Jan 2021 #10
Progressive Jones Jan 2021 #11
progree Jan 2021 #12
A HERETIC I AM Jan 2021 #13
Yavin4 Jan 2021 #21
A HERETIC I AM Jan 2021 #36
Yavin4 Jan 2021 #39
A HERETIC I AM Jan 2021 #14
progree Jan 2021 #37
mopinko Jan 2021 #16
PurgedVoter Jan 2021 #40
Progressive Jones Jan 2021 #42
BlueNProud Jan 2021 #22
edhopper Jan 2021 #25
BlueNProud Jan 2021 #35
edhopper Jan 2021 #41
Arthur_Frain Jan 2021 #27
Turin_C3PO Jan 2021 #29
Arthur_Frain Jan 2021 #31
Progressive Jones Jan 2021 #32
dalton99a Jan 2021 #28
marie999 Jan 2021 #34
Quixote1818 Jan 2021 #43

Response to Progressive Jones (Original post)

Fri Jan 29, 2021, 11:38 PM

1. When it comes to trading stocks, you can take a short position on the direction of the stock.

What that means is that you feel that a stock will be worth less tomorrow than it is today. So, you enter into an agreement where you will borrow the value of that stock today and in return, you will pay back that stock at its value in the future.

For example, a stock today trades at $50 a share, and you take a short position. You borrow the $50, the price of the stock today, with the promise that you will repay the stock at its value in the future. Now, it's a week later, and the stock now trades at $10 a share. You re-pay your loan of $50 with the value of the stock which is now only $10. In essence, you made $40 profit.

Hedge funds and other big money types short stocks at times to drive down their prices, so that they can do what I just explained on a massive scale. Most of the time, this happens because a corporation is facing difficult times ahead,

Game Stop, a brick and mortar retailer, is one such struggling company. Given the pandemic and the overall decline of retail, it's a prime candidate for a short sell. Borrow the value of its stock today because it will be worthless in the future.

Here's where that Reddit community comes in. A bunch of day traders starting buying up Game Stop's stock which made the value of the stock rise. So now, those hedge funds that had short positions in that stock are facing huge losses because in order to settle their short positions, they have to pay back more money than they originally borrowed because the stock price went up, not down.

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Response to Yavin4 (Reply #1)

Fri Jan 29, 2021, 11:46 PM

2. Thanks for your insight. Nt

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Response to Yavin4 (Reply #1)

Fri Jan 29, 2021, 11:47 PM

3. That is a wonderful, succinct, and totally clear explanation.

Thank you so much for that.

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Response to Yavin4 (Reply #1)

Fri Jan 29, 2021, 11:49 PM

4. Thank you. I finally understand it now.

Wait. I do have a question. Do they (the hedge fund people) have a certain amount of time they have to pay back the short stock or can they just wait until it sinks again?

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Response to Vivienne235729 (Reply #4)

Sat Jan 30, 2021, 09:50 AM

17. it depends.

disclaimer: layperson here.

some shorts can have a defined deadline. some can be open ended, but you are paying interest every day your short is open. this is where it gets interesting with the GME situation. some hedge funds borrowed more shares than actually exist. they MUST find shares to buy to close out their short positions. the shares simply do not exist to do that. wallstreetbets is exploiting that situation, buying and HOLDING shares so there are even fewer shares available for those shorting the stock to buy. you now have to pay the astronomical price being asked, and then resell the stock at a loss so your other hedge fund buddies can close out their shorts. many of the retail buyers have dug in their heels and say they will NEVER sell. the MSM is not doing a great job on covering this. this is 100% about sticking it to the hedge funds at any cost.

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Response to uncle ray (Reply #17)

Sat Jan 30, 2021, 11:15 AM

30. Wow. What an interesting development. Those young people

I saw on some article that bought all these shares are incredibly brilliant. Who would have thought to do this?

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Response to Yavin4 (Reply #1)

Sat Jan 30, 2021, 12:32 AM

6. great summary--I'd just add they "borrowed" so many shares they cornered the market on themselves

They short sold so many shares that there were very few shares left on the market to buy. So when the demand increased (as a result of the redditors buying in) the supply was very small (as a result of the hedge funds over-shorting), and so that put tremendous extra upward pressure on the price.

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Response to Yavin4 (Reply #1)

Sat Jan 30, 2021, 12:38 AM

8. You don't borrow " the value of the shares" when selling short

You actually borrow the shares themselves.

Every Margin Agreement out there specifies that shares held under such an account are subject to this borrowing. This statement is not accurate;

they have to pay back more money than they originally borrowed because the stock price went up, not down.


That’s not the actual mechanics of how these trades operate. They have to do a “buy to cover” in order to settle the trade. THAT is where the loss comes in, because in the worst case of GameStop, their buy to cover was over $300/share instead of $6.

You are making it sound like it is a loan of money. It’s not.

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Response to A HERETIC I AM (Reply #8)

Sat Jan 30, 2021, 10:06 AM

19. The point of my post was to explain short selling in terms that a lay person can understand

and not get too specific about the actual mechanics of how it works.

Borrowing the actual shares or borrowing the value of the shares is a distinction without much of a difference. In the end, you are taking on a liability that you have to pay back at the value of the shares in the future.

My goal was to explain the concept: take on a liablity of the value of an asset with the promise to pay back that liability without getting too much into the details of the mechanics which can confuse people.

My question to you is, why are you so hostile in your post? We're not in class here. I don't understand why your post has such a nasty tone to it.

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Response to Yavin4 (Reply #19)

Sat Jan 30, 2021, 10:11 AM

20. Thanks, Yavin.

I appreciate your explanation. Pay no mind to someone who is trying to get into a ridiculous pissing match with you.

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Response to smirkymonkey (Reply #20)

Sat Jan 30, 2021, 01:15 PM

38. .....

Pissing match?!?



Fine. Yavins explanation of how to sell short was spot on perfect.

He was right and I was out of line.


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Response to Yavin4 (Reply #19)

Sat Jan 30, 2021, 10:35 AM

23. +100000000000000000000000000000000 x infinity

 

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Response to Yavin4 (Reply #1)

Sat Jan 30, 2021, 01:07 AM

9. Thanks !!! A couple more questions that came to me while reading your explanation.


You said that one would borrow the value of a stock today, and pay back the stock's value at a later date.

Is the borrower in this arrangement being lent cash against stock that the borrower already holds, or are they actually borrowing shares of the stock?

Did the day traders all just coincidentally happen to notice what was going on with the GameStop stock, or was this a
sort of organized thing?

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Response to Progressive Jones (Reply #9)

Sat Jan 30, 2021, 09:59 AM

18. Whether you borrow the actual cash value of the stock or rent the stock itself,

it's still a form of a liability that has to be paid back at a particular value in the future.

This was an organized effort by the Game Stop day traders to push the value of the stock higher which meant that the current liability of the holders of the short grew much higher.

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Response to Progressive Jones (Reply #9)

Sat Jan 30, 2021, 11:33 AM

33. Maybe think of it this way for simplicity

 

You sell a security you do not currently own at a high price, betting that you will be able to repurchase the security later at a lower price to return to its owner. This is a strategy largely undertaken by institutional investors. There is a pretty good discussion at https://thismatter.com/money/stocks/selling-short.htm

The issue here is that a large number of small retail investors using Robinhood to affect their trades allegedly used social media — a Reddit discussion group in particular— to collude and coordinate their stock purchases to create a seemingly large demand and artificially drive up the price of GameStop and AMC stock, despite the fact that the stocks fundamentally should be declining in value. Some retail investors sold the stock to make astronomical profits. The large institutional investors that had been selling short started to take a bath, and Robinhood ceased allowing retail investors from trading in the stock, while institutional investors were allowed to continue. In other words, the market was manipulated by both the retail investors and then by Robinhood, and there are a number of issues with potential violation of federal securities laws on both sides that are the subject of ongoing investigations. The underlying question seems to be what effect social media can have on what is supposed to be an efficient market. It’s similar to the discussion regarding Facebook and the spread of false information in many respects.

Here is an WSJ article that summarizes the GameStop/AMC issues. https://www.wsj.com/articles/gamestop-stock-reddit-and-robinhood-what-you-need-to-know-11611960243

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Response to Yavin4 (Reply #1)

Sat Jan 30, 2021, 04:30 AM

15. Almost there

When you short stocks, you rent the stock from your broker and sell it. Then one of two things happens; it goes down enough to give you the profit you want, at which time you buy it back and return it, or it goes up and your broker calls it in so she can sell it herself. The ideal as far as you’re concerned is for the company to go out of business, which means you get to keep the entire sale price. (This is probably what the shorts had in mind for GameStop.)

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Response to Yavin4 (Reply #1)

Sat Jan 30, 2021, 10:53 AM

26. Thank you! I've been looking for an explanation of "this week" all week, but everywhere..

... I looked assumed that I knew what shorting was. AND how little investors could affect big investors. AND what Game Stop was.

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Response to Progressive Jones (Original post)

Sat Jan 30, 2021, 12:20 AM

5. Basically the ending to

"Trading Places" starring Eddie Murphy and Dan Aykroyd... kinda?

TlalocW

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Response to TlalocW (Reply #5)

Sat Jan 30, 2021, 10:37 AM

24. +100000000000000000000000000000000 x 2

 

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Response to Progressive Jones (Original post)

Sat Jan 30, 2021, 12:34 AM

7. Thanks for the easy to understand overview

 

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Response to Progressive Jones (Original post)

Sat Jan 30, 2021, 01:37 AM

10. A Simple Explaination of Shorting Stock.


I borrow a bag of sugar from you because I know someone who will pay the current value for it and I suspect the price of sugar will go down.

If sugar goes down in price then when I buy a bag to give back to you next week, I made a profit. I only do this when I think I have a sure bet. If next week the price of sugar goes down I can profit by the reduction of price. If however the price of sugar goes up, I am on the hook and have to pay the new value.

If the sugar I borrowed from you cost five dollars, then the most I can possibly make is five dollars if sugar becomes free. If however that amount of sugar now costs a million dollars I loose five dollars less than a million dollars.

So the potential loss vs potential gain of shorting stock makes it dangerous. It also makes me, as the snake that is using your sugar to make money, interested in having sugar go down in value. This means that by allowing shorting to be used as an investment tool, I allow a bias that profits on the failure of business. Since the creation of stock exchanges was based on the theory that it would help with job creation and the success of businesses, this is dirty pool.

This is the problem with stock exchange in general. There are ample opportunities to make a profit off of the misfortune of others. There are even more dangerous things that these high dollar markets can do.

Now that water can be speculated on in the commodities market, a person can make a fortune by manipulating the availability of water. This puts the common man at risk. It puts crops at risk, health at risk. Water being put on the commodities market means that someone rich might just want to persuade officials to not make good decisions.

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Response to PurgedVoter (Reply #10)

Sat Jan 30, 2021, 02:04 AM

11. Is the "bag of sugar" shares of stock, or cash against shares already owned by the borrower? nt

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Response to Progressive Jones (Reply #11)

Sat Jan 30, 2021, 02:53 AM

12. Here's my version as it's been explained to me

When I sell 1000 shares of XYZ corporation short, I am borrowing 1000 shares from a broker and then I sell those shares on the open market. If the current price is $30/share, I get 30*1000 = $30,000 from the sale that I put in my pocket. Cool.

But I have to eventually give the shares back to the broker. I don't know what the time frame of that is, I think a few weeks.

Remember: He who sells what isn't his'n, must pay up or go to prison.

(the female and gender neutral versions of that don't rhyme as well).

Anyway, the time comes when I have to give 1000 shares back to the broker. Let's say at that time, I can buy 1000 shares for $10/share on the open market and do so, at a cost to me of 10*1000 = $10,000.

And then I give the 1000 shares that I just bought to the broker.

Cashwise, I pocketed $30,000 but had to spend $10,000 to buy back the shares, leaving me with a $20,000 profit. Life is good.

But what if instead, when it came time to buy the shares, the price was $40/share rather than $10/share? Well I'd have to pay $40,000 for the 1000 shares. And then I give those 1000 shares to the broker.

Cashwise, I pocketed $30,000 but had to spend $40,000 to buy back the shares, leaving me with a $10,000 loss. Life sucks and then you die.

Edited to add: If A HERETIC I AM corrects this, he is almost certainly right since he actually worked as a broker.



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Response to progree (Reply #12)

Sat Jan 30, 2021, 03:08 AM

13. No correction from me, old pal. You are spot on correct

And your explanation is more accurate than Yavin gives above, because he suggested the process involved borrowing “ the value” when in fact, you do borrow the shares as you said.

With the proliferation of online trading platforms, people can see this for themselves if they have an account, because the option “Buy To Cover” will be among the available transaction types.

As I mentioned above, the actual shares used for this are held in Margin accounts typically. A given broker dealer will have access to those shares, should a retail customer choose to short an issue.

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Response to A HERETIC I AM (Reply #13)

Sat Jan 30, 2021, 10:16 AM

21. The concept of Short Selling is not limited to just stocks.

There are a number of ways of achieving a short position. The most fundamental method is so-called "physical" short-selling, which involves borrowing assets (often securities such as shares or bonds) and selling them. The investor will later purchase the same number of the same type of securities in order to return them to the lender. If the price has fallen between the time of the initial sale and the time the equivalent securities are repurchased, the investor will have made a profit equal to the difference. Conversely, if the price has risen then the investor will bear a loss. The short seller must usually pay a fee to borrow the securities (charged at a particular rate over time, similar to an interest payment), and reimburse the lender for cash returns the lender would have received had the securities not been lent out, such as any dividends that would have been payable to the lender if they were still the holder of shares that they had lent out.

Short positions can also be achieved through futures, forwards or options, where the investor can assume an obligation or a right to sell an asset at a future date at a price that is fixed at the time the contract is created. If the price of the asset falls below the agreed price, then the asset can be bought at the lower price before immediately being sold at the higher price specified in the forward or option contract. A short position can also be achieved through certain types of swap, such as contracts for differences. These are agreements between two parties to pay each other the difference if the price of an asset rises or falls, under which the party that will benefit if the price falls will have a short position.


https://en.wikipedia.org/wiki/Short_(finance)

The concept is that you are "renting", "borrowing", or gaining the value of an asset today while taking on the liability of paying back said asset at a future time at the value of that asset in the future.

Again, why are you so hostile? Is it because I got some praise for my post? Is that it? Are you that petty?

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Response to Yavin4 (Reply #21)

Sat Jan 30, 2021, 12:38 PM

36. Are you serious?!? And no shit.

I am fairly familiar with the difference between having a “short” vs. a “long” position, and I know they come in many shapes and sizes, but I appreciate the Wikipedia cut and paste.



You think I’m being hostile, merely because I pointed out an inaccuracy in your explanation?

Wow.

If you had more confidence in your readers instead of assuming that they needed to have an explanation written for a “layman”, I wouldn’t have said a word.

I don’t give two shits if you got praise for what you wrote, but if you are going to give an explanation on a question that has an easily discoverable answer, why dumb it down?

The OP asked a fairly simple question, one that is easily researchable and has a SPECIFIC answer, and your explanation was inaccurate. How is pointing that out deemed to be hostility?

Never mind. You win. You are correct and I was out of line.

Have a good day.

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Response to A HERETIC I AM (Reply #36)

Sat Jan 30, 2021, 02:17 PM

39. The exact title of the OP:

I know little-to-nothing about stock trading. Can someone please give me the "Dummie's" version...


That's why I used laymen terms.

Also, my post was not inaccurate as I explained the concept of short selling not the actual mechanics of shorting a stock. You failed in your attempt to show how my post was "inaccurate".

"Renting" or "Borrowing the value" of a stock is the same damn thing. Whatever term you use, your account shows a liability when you enter into a short sale.

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Response to progree (Reply #12)

Sat Jan 30, 2021, 04:03 AM

14. BTW, the expiration of a short position...

Depends on a couple factors, well described in this short article on Investopedia

I read an article years ago about short positions on ENRON (remember them? LOL) that were held for an extended period and exercised at one cent!

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Response to A HERETIC I AM (Reply #14)

Sat Jan 30, 2021, 01:11 PM

37. Thanks much. I don't know where I got "a few weeks" from, probably that came from some kind

of unrelated option or another that I read about.

Yes, I remember ENRON. I used to work for an electric utility (Northern States Power, now Xcel), but that was before the wild west craziness in the energy sector that culminated with ENRON's collapse.

The brother of my boss was involved in starting NRG, a spinoff from NSP and a similar company to ENRON in many ways. Prior to the spinoff, the NRG unit dragged NSP's stock price down to a ridiculously low level, so I bought a whole bunch, doubled my money in a couple of days, and sold. (The only individual stock I ever bought other than automatically thru the ESOP. Wish I had held on for a lot longer).

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Response to Progressive Jones (Reply #11)

Sat Jan 30, 2021, 07:53 AM

16. it can be either.

that's what stock option are about.
portfolio managers are always buying options on stocks they own. that's called a 'put'.
but you dont have to own them, that's called a 'naked put'.
it's up to the buyer to decide if they think you are worth enough to cover a naked put.
if someone wants to take you down, they'll buy your naked puts hoping to screw you.

options only cost a few pennies on the dollar, and the price depends on the outlook for the stock.
they come due quarterly, and at the end of the quarter they can be allowed to expire by the buyer, or they can be 'called'. the vast majority of options just expire.

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Response to Progressive Jones (Reply #11)

Sat Jan 30, 2021, 02:20 PM

40. bag of sugar is stock nt

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Response to PurgedVoter (Reply #40)

Sat Jan 30, 2021, 10:04 PM

42. Thanks ! Yeah, I got that part. I just wasn't clear if the loan was cash or stock. Got it now. nt

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Response to Progressive Jones (Original post)

Sat Jan 30, 2021, 10:30 AM

22. A bunch of Dumpy Incels and gamer dweebs getting their jollies.

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Response to BlueNProud (Reply #22)

Sat Jan 30, 2021, 10:38 AM

25. A large group of regular people

beat a few greedy, corrupt money managers at their own game.

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Response to edhopper (Reply #25)

Sat Jan 30, 2021, 11:44 AM

35. Trust me Dump will align himself with these white bros.

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Response to BlueNProud (Reply #35)

Sat Jan 30, 2021, 04:23 PM

41. Lets hope not.

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Response to BlueNProud (Reply #22)

Sat Jan 30, 2021, 11:09 AM

27. Gee, that's how I'd characterize the insurrection gang.

Dumpy's incels, and gamer dweebs, most of whom never saw “action” if it wasn’t on a video screen.

But then I’d include neckbeards, fake patriots, people who understand nothing about the constitution, and idiots in that crowd too.

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Response to Arthur_Frain (Reply #27)

Sat Jan 30, 2021, 11:13 AM

29. There's plenty of

progressive “gamer dweebs” as you call them, my brother and his friends among them. To be sure, there’s a loud asshole segment of MRA/Trumper/INCEL types but it’s a mixed crowd like anything else.

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Response to Turin_C3PO (Reply #29)

Sat Jan 30, 2021, 11:18 AM

31. I'm quite aware that gamer dweebs cross the political spectrum.

I’m one in fact. Not ballsy or with enough expendable income to spend any time doing what wallstreetbets “gamer dweebs and incels” are doing, but I’ve been watching their drama against Wall Street all month.

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Response to Arthur_Frain (Reply #27)

Sat Jan 30, 2021, 11:25 AM

32. LOL ! Lots of crossover there ! n t

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Response to Progressive Jones (Original post)

Sat Jan 30, 2021, 11:12 AM

28. Good thread.

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Response to Progressive Jones (Original post)

Sat Jan 30, 2021, 11:33 AM

34. In order to short a stock you must have a margin account.

Someone else should explain what a margin is. We have a 50% margin, which means we can buy more stock by borrowing from our broker.

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Response to Progressive Jones (Original post)

Sat Jan 30, 2021, 10:08 PM

43. Here you go! Margot Robbie explains finance terms

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