Investing is kinda like betting…when you invest in a company, commodity, etc, you essentially bet that it will succeed by growing and making a profit.
Can you bet…and make money…on something failing?
You win because everyone else loses?
Yep, its called selling short.
Yes. Two ways are by shorting and put options. Shorting is more dangerous because there is unlimited downside: it’s the exact opposite of investing, so if the stock quadruples you’d in theory be out 4x your initial anti-investment (but in actuality you’d probably be forced to sell before that). If the stock tanks you make that same amount of money. Put options are the option to sell at a certain price, so if the stock goes below it, you can sell at the higher price and make money, and your losses are limited to your initial investment because you are not required to exercise the option.
Shorting stock for idiots (because I didn’t understand it either and I looked it up):
Basically, you think Company A’s stock is going to tank. So you borrow shares in Company A and immediately sell them. Then you wait. Hopefully the stock price drops, hopefully significantly, at which point you then buy shares at the lower price and return them to whoever you borrowed them from, pocketing the difference.
Because of how it works, it’s a pretty big risk, and your losses from shorting a stock, if it goes up rather than down, can be unlimited, so you’d better be pretty sure that stock is going to drop.
I’ve done the naked short and you can’t lose an “unlimited” amount of money; your broker will intervene before then 
There are also inverse ETFs and things like that, but those just apply to broad markets, not single companies.
I don’t want to write a long post but know that:
(1) Investing and gambling aren’t the same thing. You should expect to make money when you invest and lose money when you gamble. I know which one I prefer.
(2) It’s really hard to make money betting that a company will fail or lose value. The techniques for making money on failing companies, like shorting stocks, buying put options, shorting equity index futures, or investing in structured inverse ETFs all have negative expected values. They are essentially more like gambling than investing.
(3) It’s not too hard to make money investing. Greater rewards do come with greater risk but there are ways to get decent returns without taking scary amounts of risk. You’re probably better off looking into those investing opportunities than trying to figure out how to profit on your confidence that Tesla is going bankrupt eventually.
Another reason for a small investor not to short stocks is that the game is rigged against you.
When a big player sells short, the funds from the sale are his: he can use them to buy a different stock, or at least draw interest.
Most (not all) retail brokers, however, do not extend this courtesy to small investors. The funds from your short sale will be sequestrated and will NOT pay interest. In fact, if the shorted stock rises in price, the brokerage will sequester more and more of your cash, not paying interest. (You may be able to borrow funds for the sequester — at a highish interest rate — by using your long holdings as collateral.) Since stock trading, like baseball, is a “game of inches”, this makes short sales a losing proposition even when interest rates are low.
If you think it through carefully then, ignoring broker’s reasonable service charges and expenses, you SHOULD be paid interest on the sale’s proceeds. After all, YOU are required to pay any dividends on the shares you borrowed.
(An exception may be “shorting aginst the box” where you don’t borrow shares to short but use shares you already have. Since the main purpose of this is to defer capital gains taxes the IRS has increased regulation of this.)
This is technically sort-of true, but quite misleading.
Whenever we trade with a view to profit, anything we do involves the ratio between two assets changing. Two assets are always involved, and we are always long one and short the other. When one of the assets is cash , we don't usually think of it that way, but it's still technically true: if we buy Apple shares, we are betting that the Apple:USD *ratio* increases - we can think of this as being *long* Apple and *short* USD! The reason that we don't usually think of it this way is that we usually use that we already have sitting around, so we don’t have to borrow the to effect the trade. But not always - that's what a margin account is for. Buying Apple shares on margin is *literally* borrowing to "sell the short vs Apple". We hope that the value of goes down vs Apple (Apple goes up), so we can buy back the (sell Apple) later and repay the we borrowed, with some profit left over.
Another way to see the symmetry, the fact that all trades technically involve both a long & short side, is to think about currencies. For a US trader, the British Pound is an asset that he can sell short, just he can sell Apple stock short. But from a British investor’s point of view, the is an asset he can buy. The US trader "sells £ short" in his -denominated margin account. The British trader “buys " in his £-denominated margin account. Can it really be true that the US trader is exposed to unlimited loss (because he's short) whereas the British trader is not? If you think about it carefully, the two traders have done *exactly the same trade*, they have both sold £ for , they are both hoping that the ratio :£ increases. It's just that one thinks of it as "short £ / long ”, whereas the other thinks of it as “long $ / short £”. The only difference is their perspective, the currency in which they conventionally denominate their wealth.
So what determines the riskiness of a trade is not whether it involves a short, since in a mathematical sense all trades are about a ratio, so they all involve both a long and a short side. What really matters much more is the riskiness of the two assets involved, and the leverage you are using, the proportion you have borrowed to finance the position. The reason that shorting a specific stock can be extremely dangerous is because some speculative stocks can go up tenfold very rapidly. But if you have a massive stock like Apple, that’s extremely unlikely. Arguably, shorting Apple is far less risky than buying some highly speculative small company. Sure, in theory Apple stock could go up 1000%, whereas on the highly speculative stock you can ultimately in the worst case only lose 100%. But we aren’t usually concerned with such huge extremes. What’s more relevant may be the risk of Apple going up 25% vs the speculative stock going down 25%, and the latter may be a much bigger risk.
And when you look at much bigger things like currencies, or the stock market as a whole - something like S&P futures - the relative risks of being long or short are usually fairly symmetrical.
Please stay away from these. These are absolutely designed to generate high fees, they are totally unsuitable for non-professional investors, and professional investors won’t touch them because they know they are a ridiculous idea. They should be banned.
The nature of the mathematics of lognormality means that they must be rebalanced every single day, and constant rebalancing means high transactions costs. If you read the small print, what they are really paying you is based on daily changes. It’s possible for the market to go down substantially over the course of a year, yet you could still lose money on an ostensible “inverse ETF” for that market, depending on the path the market took to get there!
If you are determined to take a short position in a major market, open a futures account, use something like S&P futures. Transactions costs are minimal and the market is highly efficient, so at least you’re faced with a fairly symmeterical prospect of gain or loss.
Yes to all of the above. I absolutely do not recommend inverse ETFs. As you say, the market can drop 20% over a year, but that doesn’t mean your inverse ETF gained 20% that year. You could still have lost money with that ETF, depending on, like you say, the day-to-day movement of the market, which is what the ETF is trying to replicate inversely. And even worse if you invested in a leveraged inverse ETF.
Some people made massive amounts of money when the 2007-2008 US housing market crisis hit. The movie The Big Short was based on a book that described several instances of this, including one case where a hedge fund manager, predicting the crisis as early as 2005, risked $1 billion and ended up with a net profit of $2.69 billion, a ROI of 269% in just a few years’ time.
This is, I think, the best fit for the OP’s phrase:
In this case, the entire economy imploded, and a select few who saw it coming reaped a windfall.
Yes poor broker rates on borrowed/lent cash are a big drawback to either buying on margin or short selling individual stocks as a retail investor. The closest thing to exception in either direction is Interactive Brokers, but even they pay nothing on amounts under $100k and the Fed Funds rate minus 1.25% up to $1mil. This didn’t matter much for awhile with short term rates near zero, but does again now.
Their rates on margin loans are also way better than other retail brokers but what they take out is still a significant drag in the case also. Brokers really charge very little now in transactions costs for normal buy/sell. For short selling and buying on margin it’s more like the old days of taking big fees. But, most people have no business doing either.
However if one is really convinced they are an exception and have a comprehensively negative view of the stock market as a whole, as OP post implies, they can readily get a good implied interest rate on cash proceeds by not shorting individual stocks nor shorting broad market ETF’s, nor buying inverse ETF’s, but by shorting stock index futures. The price of the futures contract will reflect both the dividends you’re not paying (which you would also have to pay if short a stock across an ex-dividend date) and the interest you’re not receiving on the cash proceeds of the short sale out to the contract maturity date. That implied interest rate is the market clearing rate for financing stock positions for big institutions which dominate the futures market. But everyone gets the same futures price, to within a small smidgen of execution and commission difference, from the biggest institutions to retail investors shorting one contract.
I don’t think this is correct.
The value of money is really a “placeholder” for things it can buy. The reason the British guy looks at the currency same deal differently than the American guy is not because of differences in how they “conventionally denominate their wealth”, but rather because of differences in how they’re likely to pay for things they buy. The British guy is going to buy (mostly) things which are tied to the price of a pound, so he’s relatively sensitive to his worth in pounds, and the opposite is true for the American guy. In that sense, you can’t look at money and shares of a stock as being fundamentally equivalent, because one represents a broadly accepted value and is how you’re going to buy yourself a house or a can of beer, and the other does not.
It’s technically correct to say that buying on margin is like shorting money, but that has very little practical application. The equivalent situation to shorting a stock and having it massively increase is investing your money in stocks and then see massive deflation, such that your money-denominated debt is impossible to repay since that amount of money is now unattainable. However, massive deflation on that scale is not a possibility that anyone needs to take seriously. But stocks increasing by 10000% is a very real possibility, especially for the very risky stocks which are most commonly shorted (e.g. Amazon, back in the early days. I remember when it was $10 a share and rumors were that their auditor would issue a “going concern” letter).
It was a hell of a ride, though, and he almost lost everything even though he was correct and timed things very well.
“The market can stay irrational longer than you can stay solvent” is a good thing to keep in mind. Yes, you can make a killing if you see something that everyone else is missing. But not always.
FWIW, if you invest in Bonds, you make money when the interest rates fall. If you invest in grain futures, you make money if the harvest fails.
What about frozen concentrated orange juice?
Credit default swaps are a form of insurance for bondholders. However, you don’t have to actually won the bond to buy the swap, aka the insurance. So if you think a bond-issuing company is gong to fail, buy credit default swaps against their bonds. Think about it as being analogous to buying car insurance for a really bad driver, but you get the payout instead of the people involved in the car accident.
I’m not going to hunt for cites but there was some outrageous hanky-panky going on circa 2006-2007.
Banks encouraged customers to buy certain bonds, while betting against them. In some cases they imposed restrictions on borrowers whose sole purpose was to encourage default, and hence bank profit on their “default swaps.”
IIRC, zero bankers went to jail for this.
I just finished reading When the Wolves Bite, which is all about a short. Investor Bill Ackman, who had successfully shorted companies in the past, decided that Herbalife was a Ponzi scheme and shorted the stock. Then another activist investor, Carl Icahn, decided to take the long position. It’s an interesting read, and provides a lot of insight into how shorts work at the highest level.