The first time I watched Oliver Stone’s movie Wall Street 2, I was confused by something: Josh Brolin’s company, Churchill Schwartz, made a ton of money when the stock price of the company Shia LaBeouf’s character works for, Kellar Zabel (KZI), dramatically dropped. How does someone get rich when stock prices go down?
Here’s how shorting a stock works:
There were many factors in the movie, but the basic answer is that Schwartz was “shorting” Kellar Zabel’s stock. What does that mean? Let’s break it down:
1. You think company KZI is going to do poorly in the near future. Maybe it’s a trend you’ve noticed, a new CEO you don’t trust, or just a gut feeling. Normally, when you believe in a company, you go “long” on a stock. But if you don’t have faith, you decide to “short” it.
2. You arrange with a broker to sell a certain number of shares at the current market price. For example, you sell 1,000 shares at $100 each, totaling $100,000.
3. In a short sale, there’s a set period you have to repay the broker the same number of shares they sold for you.
4. If your hunch was right and KZI’s price drops to $25 per share, you then buy back the 1,000 shares at $25 each, totaling $25,000.
5. You just made $75,000 (before fees and taxes).
Gambling on the future:
That sounds great, but there’s a catch. If the price had gone up to $300 per share, you’d have to buy back the shares for $300,000, meaning you’d lose $200,000. Ouch!
Unless you can predict the future or have some insider information, shorting a stock is like gambling because you’re betting on what might happen. Many experts say this differs from traditional investing, as most people invest with the hope that companies will do well and their stock prices will rise. Just like with any complex investment strategy, never use a tactic you don’t fully understand.
Movie trivia:
Though Wall Street 2 is fictional, it’s inspired by real events from the Great Recession in the late 2000s. Kellar Zabel represents Bear Stearns, which collapsed in 2008 and was acquired by JP Morgan Chase. Churchill Schwartz is a mix of Goldman Sachs and JP Morgan Chase. The movie even includes scenes like kids “blowing bubbles” (hinting at economic bubbles) and a shot of the building where Bernie Madoff committed his Ponzi scheme.
Have you ever thought about shorting a stock? How do these strategies fit into your investment portfolio?
