 |
|
Talking
English
Your Passport to Better Language Communication |
|
|
|
|
|
|
(James) Bonds and Shares
I wonder how many viewers found the recent James Bond film, Casino Royale confusing? The villain Le Chiffre, an unscrupulous banker who manages money for terrorist organizations, uses his connections to stage attacks against certain companies in order to sell stocks with his clients' funds and make a huge fortune.
Similarly, prior to 9/11, the Israeli Herzliyya Institute for Counterterrorism had military intelligence that unknown individuals - with accurate advanced knowledge of the attacks - had purchased an obvious and unusually large number of shares in United and American Airlines shortly before the attacks.
The day after the attack these shares where sold and a vast profit was made. In the film, Bond foils Le Chiffre's plans to blow up a new plane causing him to make losses in the region of a $100 million.
I know that James Bond films are not meant to provoke intelligent thought. However, for the next two hours, instead of enjoying the film, I was wondering how could it be possible to buy shares that fall in price and still make a profit? When I got home, I did a google search.
Short selling
Typically an investor buys a stock and hopes it will increase in value. He tries to "buy low and sell high." But if you believe the price of a stock will fall you can sell a stock short. Here, the goal is to sell "high" and buy the stock back "low."
When you short a share, you borrow the shares from your broker and sell it in the market hoping to buy it back later at a lower price. Here's how it works:
Assume you think Nokia shares will drop in price. You short 100 shares trading at €100 a share. You borrow those shares from your broker who then sells them at the going price and deposits the €10,000 from the sale into your account. Now you owe the broker 100 shares of Nokia regardless of the price of the share. Now assume the price of Nokia shares fall to €50. You buy the 100 shares in the market for €5,000 and return the shares to your broker. That leaves you with a profit of €5,000 excluding commission. If however you bought back the share at a higher price, say €150, you would return the shares to your broker, but you would have lost €5,000:
Thus, in the film when James Bond saved the plane, instead of falling in price, the price rose and Le Chiffre had to return the shares to his broker at a loss.
Mike Bangle is the owner of Talking English language consultancy and can be contacted at mike.bangle(at)phnet.fi
Word List
|
|
|
|