I would appreciate any clarification. I'm a newbie.
From the Wall Street Journal:
When the SP500 goes down SDS goes up twice as much. ie. SP500 goes down 1% ,
SDS will go up 2%.
If one is doublely sure the market is going down , SDS is what you want to buy to make twice the money. But if you're wrong you'll lose twice as much.
To answer your subject line question, they do it by investing in a portfolio of highly rated securities and then using the portfolio as collateral for trading derivatives and swaps which gave the desired negative leverage. The best way to understand the nature of these securities is by reading the prospectus.Unfortunately, Proshares bundles their prospectii for all the funds; thus you have to wade through a lot of irrelevance to find the proper document. The prospectus can be downloaded in .pdf form from the sponsor website
