Shorting A Stock Example

Short selling is controversial because when a large number of investors decide to short a particular stock their collective actions can have a dramatic impact on the company s share price.

Shorting a stock example. You might place a short sale order with your broker for 1 000 shares of abc. If large numbers of market participants decide to short a stock their collective actions can have a huge impact on the share price of the company. Say you ve been reading up on company x and you re certain the value is going to go down. Example of a short sale.

As an example if you short 100 shares of stock at 10 per share and it jumps to 100 then you ll be on the hook for 10 000 when you buy the stock back even though you only got 1 000 in. Shares of the northern pacific railroad shot up to 1 000 resulting in the bankruptcy of some of the wealthiest men in the united states as they tried to repurchase shares and return them to the lenders from whom they had borrowed them from. For example if an investor thinks that tesla tsla stock is overvalued at 625 per share and is going to drop in price the investor may borrow 10 shares of tsla. Short selling is motivated by the belief that a security s price will decline enabling it.

It is not unknown for investors to be banned from short selling. For example during the 2008 financial crisis there was a ban on shorting the shares of certain banks and financial institutions. Many companies will blame short sellers for sharp declines in their stock. Hedge a hedge is an investment that is designed to reduce the risk to a portfolio of an adverse price movement.

Bans on short selling have been enacted on several occasions. Let s use an example to demonstrate it. Let s say you think stock abc will drop in price from its current price of 10. Therefore the investor borrows 100 shares from a broker while short selling those shares to the market.

For example a stock with 4 million shares short and 1 million in average daily trading volume would have 4 days to cover. In short selling a stock the investor doesn t actually own it. Example of short selling. An investor believes that stock a which is trading at 100 per share will decline when the company announces its annual earnings in one week.

One famous and catastrophic example of losing money due to shorting a stock is the northern pacific corner of 1901.