A Short Selling Example | Firstrade

To sell short, you sell shares of a security that you do not own, which you borrow from a broker. After you short a position via a short-sale, you eventually ... Search OPENANACCOUNT LOGIN NeedLoginHelp? NeedLoginHelp? SelectStartPage Home Balances Positions Stock&ETFTrading OptionTrading OrderStatus AccountHistory MarginLoans ShortSelling Shortsellingstocksisastrategytousewhenyouexpectasecurity’spricewilldecline.Continuereadingaboutshortsellerstolearnhowyoucanusethisstrategy.Thetraditionalwaytoprofitfromstocktradingisto“buylowandsellhigh”,butyoudoitinreverseorderwhenyouwishtosellshort.Tosellshort,yousellsharesofasecuritythatyoudonotown,whichyouborrowfromabroker.Afteryoushortapositionviaashort-sale,youeventuallyneedtobuy-to-covertoclosetheposition,whichmeansyoubuybacktheshareslaterandreturnthosesharestothebrokerfromwhomyouborrowedtheshares.Youcanmakeaprofitfromshortsellingifyoubuybackthesharesatalowerprice. Whenyoutradestocksinthetraditionalway(“buylowandsellhigh”),themaximumamountthatyoucanloseisyourinitialinvestment.However,whenshortsellingstocks,yourlossesaretheoreticallyunlimited,sincethehigherthestockpricegoes,themoreyoucouldlose.Youwillbechargedinterestonlyonthesharesyouborrow,andyoucanshortthesharesaslongasyoumeettheminimummarginrequirementforthesecurity.Reviewtheshortsellingexamplebelowtoseehowshortsellingastockworks. ExampleofShortSelling: AninvestorbelievesthatStockA,whichistradingat$100pershare,willdeclinewhenthecompanyannouncesitsannualearningsinoneweek.Therefore,theinvestorborrows100sharesfromabrokerwhileshortsellingthosesharestothemarket.Sonowtheinvestor“shorts”100sharesofStockAwhichhedidnotownwithhopesthatthesharepricewilldecline. Aweeklater,StockA’spricefallsto$90pershareafterthecompanyannouncesannualearnings.Theinvestordecidestoclosetheshortposition,sohebuysback100sharesofStockAfromtheopenmarketatapriceof$90pershareandreturnsthosesharestothebroker;thisisabuy-to-coverorder.Therefore,theinvestormakesaprofitof$10persharewhichisatotalof$1,000forthewholetransactionnotincludingcommissionsandinterest. However,ifthestockpriceincreasesto$110pershareandtheinvestordecidestoclosetheshortposition,hewillneedtobuy-to-coverthe100sharesfromtheopenmarketatthecurrentpriceof$110pershare.Thelossforthisshortsaletransactionwillbe$10persharewhichamountstoatotallossof$1000(excludingcommissionsandinterest),sincethestockshareswereboughtbackatahigherprice. 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