Short selling (stocks): Difference between revisions

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Latest revision as of 21:41, 18 March 2024

"Short selling" of stocks is a way to make money from a decline in price of a stock over time.

In other words, if the investor thinks a stock will lose value over time, the investor can make money via a "short sale"
the concept is: "sell to open / buy to close"

Borrow a stock from someone else
1. usually from a stock broker
"Sell to open"
"Buy to close"
1. = Buying the stock back later at a cheaper price (hopefully)
2. the Short Seller

Steps

Sell to Open:
1. borrow stock and sell at current price
  1. the borrowed stock is owed back after a period of time
  2. sell the borrowed stock at current price
  3. keep the cash
Buy to close
1. the stock must be returned to the original owner after a period of time.
2. so the Short Seller must buy the stock at the new price
3. then return the shares to the owner
4. the difference between the stock price at "Sell to Open" versus "Buy to close" = profit or losss

Profit scenario:

Loss scenario:

Schematic representation of physical short selling in two steps. The short seller borrows shares and immediately sells them. The short seller then expects the price to decrease, after which the seller can profit by purchasing the shares to return to the lender. (wikipedia)

@@ Line 1: / Line 1: @@
+{| style="float:right; margin-left: 10px;
+|
+{{#mermaid:graph TD
+subgraph "STEP 2. BUY TO CLOSE"
+SS1[SHORT SELLER]--MUST RETURN THE BORROWED SHARES-->2[BUYS THE STOCK AT NEW PRICE ex. $80]--MUST RETURN THE STOCK TO-->SO2[ORIGINAL STOCK OWNER]
+end
+}}
+|-
+|{{#mermaid:graph TD
+subgraph "STEP 1. SELL TO OPEN"
+SO[STOCK OWNER]--LOANS TO SHORT SELLER usually for a fee-->SS[SHORT SELLER]--SELLS THE STOCK-->1[KEEPS THE CASH ex. $100 per share]
+end
+}}
+|-
+|}
 "Short selling" of stocks is a way to make money from a decline in price of a stock over time.
@@ Line 7: / Line 23: @@
 ## usually from a stock broker
 # "Sell to open"
-## = Sell the stock that you have borrowed at current prices
 # "Buy to close"
 ## = Buying the stock back later at a cheaper price (hopefully)
+## the Short Seller
+* Steps
+# Sell to Open:
+## borrow stock and sell at current price
+### the borrowed stock is owed back after a period of time
+### sell the borrowed stock at current price
+### keep the cash
+# Buy to close
+## the stock must be returned to the original owner after a period of time.
+## so the Short Seller must buy the stock at the new price
+## then return the shares to the owner
+## the difference between the stock price at "Sell to Open" versus "Buy to close" = profit or losss
-* Steps  1. borrow stock and sell at current price  2. buy back at certain date at present value  3. pocket difference
+'''Profit scenario''':
+{{#mermaid:graph LR
+subgraph "PROFIT"
+[SELL TO OPEN]--SELLS BORROWED SHARES FOR $100-->4[BUY TO CLOSE]--BUYS BACK STOCK AT NEW PRICE<BR>OF $80 TO RETURN TO OWNER-->1[PROFIT = $20]
+end
+}}
+'''Loss scenario''':
+{{#mermaid:graph LR
+subgraph "PROFIT"
+[SELL TO OPEN]--SELLS BORROWED SHARES FOR $100-->4[BUY TO CLOSE]--BUYS BACK STOCK AT NEW PRICE<BR>OF $120 TO RETURN TO OWNER-->1[LOSS = $20]
+end
+}}
-[[File:Short (finance).png|Schematic representation of physical short selling in two steps. The short seller borrows shares and immediately sells them. The short seller then expects the price to decrease, after which the seller can profit by purchasing the shares to return to the lender. (wikipedia)]]
+[[File:Short_(finance).png|alt=|frame|Schematic representation of physical short selling in two steps. The short seller borrows shares and immediately sells them. The short seller then expects the price to decrease, after which the seller can profit by purchasing the shares to return to the lender. (wikipedia)]]
 [[Category:Social studies]]
 [[Category:Economics]]