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> If you have an actual short position, your potential losses are unlimited. Isn’t this a bit like saying that the potential upside of holding any stock is unl

> If you have an actual short position, your potential losses are unlimited. Isn’t this a bit like saying that the potential upside of holding any stock is unlimited?

benmller313 5y ago
Yes. Is that not true?
- enos_feedler 5y ago
  Yes. It's just more likely that your shares become valued at zero then anyone valuing them at 'infinite'
- ljm 5y ago
  It is, that's the wager.
LeifCarrotson 5y ago
No, and this distinction is critical to understanding the risk that short sellers take. To use a slightly anomalous stock which hasn't split as an easy example, if you had shorted $BRK in 1980 when the price was $300, the potential upside was just 100%: In your best outcome, they go bankrupt and the most you earn is $300. Unfortunately for you, Berkshire Hathaway shares are now worth $430,000, so your $300 or 100% upside turned out to be a rounding error against the approximately -150000% loss. Edit: The reverse is technically symmetrical, but the consequences make it work out differently for the markets and society. Yes, if you'd bought BRK in 1980 you'd have had a liability of $300 (your cash input could be worthless if they went bankrupt) and a potential upside of hundreds of thousands if it went to the moon. The difference is that if you held the stock and it goes bankrupt, you're only liable for the amount that you put in. Worst case, you bet the farm and you're going to be washing dishes to put food on the table, but it's your loss to lose and your gain to win. If instead you bet the farm in a short position, you never had and will never have thousands of farms to bet in the first place; you're going to declare bankruptcy and someone else is going to have to pay for the bad bet you made. That effectively pushes the losses back on society but privatizes the gains.
- recursive 5y ago
  What? Why are you explaining shorts? The potential upside of holding a stock is indeed unlimited, and has nothing to do with short sales.
- zaat 5y ago
  And how is this different from saying that holding the stock you bought at $300 giving you +150000%? perhaps you missed GP intention?
- ac29 5y ago
  The point is, you can't lose an "unlimited" amount on a short, unless the underlying stock goes up by an "unlimited" amount.
  - damon_c 5y ago
    Is there a max limit on how much a stock can go up?
    - vasco 5y ago
      There technically is now (but should be fixed soon), related to the way prices are stored in exchanges, BRK A is giving Nasdaq a hard time: https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-stock-price-near-maximum-allowed-nasdaq-2021-5-1030397626 https://markets.businessinsider.com/news/stocks/warren-buffe...
- burnished 5y ago
  OK, but the person you were responding to was asking if this also meant that the upside was unlimited - so in your example the answer is 'yes', if you bought in at $300 the stock price can just keep going up without bound. Can you clarify why these are different?
  - LeifCarrotson 5y ago
    If you win $300, good for you, if you win $430,000, that's even better for you, but the market doesn't really care which way that goes. However, if you lose $300 that you brought to the table, that's your problem, too bad for you. If you lose $430,000 when you only brought $300 to the table, that's beyond being just your problem, that's the system's problem. A system which allows this situation to happen is fundamentally flawed, it's vulnerable to exploitation and collapse if this kind of behavior allowed to go on unchecked.
ska 5y ago
Sure, they have an inverse relationship, but the implications are really different.
greycol 5y ago
If you need to cover your short and there are no shares being sold you effectively must keep offering higher and higher prices until someone will sell you a share as you are legally obligated to buy a share[1]. To end the unlimited downside (of raising the price you'll pay by more and more) you need to have enough sell orders on the books to cover your short or have raised the price enough for someone to sell. During the time you are trying to buy your loss is increasing (as you raise the price to get a seller) and is unbounded. If you have a stock you have to sell and there are no offers to buy on the books you can't offer to sell then keep raising the price, instead you would need to keep lowering the price. The price is either limited by what's on the books, or you need to wait an indeterminate amount of time for some one to buy at the price you are selling. During this time you are trying to sell your profit is decreasing (as you lower the price to get a buyer) and bounded by $0 (for a limited liability company). So while it's true that if you hold a stock indefinitely the value you could get is unlimited with a short the value you could lose could be unlimited over a much shorter time frame. [1] Whether you actually need to cover your shorts may be a matter of some debate if you look at the wild rumors around GME
greycol 5y ago
As a sister to my comment I'll also add you can effectively (though not legally) short more stock than you can buy. This is because to short you pay for a stock at the current market price with the promise to sell it back at the same price to the lender at a future date. If you then immediately sell the stock you can use that money to immediately pay to borrow another stock. This means with the cash it takes to buy 1 share you can short as many shares as someone will lend which can multiply your loss to more than you have.

> If you have an actual short position, your potential losses are unlimited. Isn’t this a bit like saying that the potential upside of holding any stock is unlimited?

benmller313 5y ago

Yes. Is that not true?

enos_feedler 5y ago
Yes. It's just more likely that your shares become valued at zero then anyone valuing them at 'infinite'
ljm 5y ago
It is, that's the wager.

LeifCarrotson 5y ago

No, and this distinction is critical to understanding the risk that short sellers take. To use a slightly anomalous stock which hasn't split as an easy example, if you had shorted $BRK in 1980 when the price was $300, the potential upside was just 100%: In your best outcome, they go bankrupt and the most you earn is $300. Unfortunately for you, Berkshire Hathaway shares are now worth $430,000, so your $300 or 100% upside turned out to be a rounding error against the approximately -150000% loss. Edit: The reverse is technically symmetrical, but the consequences make it work out differently for the markets and society. Yes, if you'd bought BRK in 1980 you'd have had a liability of $300 (your cash input could be worthless if they went bankrupt) and a potential upside of hundreds of thousands if it went to the moon. The difference is that if you held the stock and it goes bankrupt, you're only liable for the amount that you put in. Worst case, you bet the farm and you're going to be washing dishes to put food on the table, but it's your loss to lose and your gain to win. If instead you bet the farm in a short position, you never had and will never have thousands of farms to bet in the first place; you're going to declare bankruptcy and someone else is going to have to pay for the bad bet you made. That effectively pushes the losses back on society but privatizes the gains.

recursive 5y ago
What? Why are you explaining shorts? The potential upside of holding a stock is indeed unlimited, and has nothing to do with short sales.
zaat 5y ago
And how is this different from saying that holding the stock you bought at $300 giving you +150000%? perhaps you missed GP intention?
ac29 5y ago
The point is, you can't lose an "unlimited" amount on a short, unless the underlying stock goes up by an "unlimited" amount.
- damon_c 5y ago
  Is there a max limit on how much a stock can go up?
  - vasco 5y ago
    There technically is now (but should be fixed soon), related to the way prices are stored in exchanges, BRK A is giving Nasdaq a hard time: https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-stock-price-near-maximum-allowed-nasdaq-2021-5-1030397626 https://markets.businessinsider.com/news/stocks/warren-buffe...
burnished 5y ago
OK, but the person you were responding to was asking if this also meant that the upside was unlimited - so in your example the answer is 'yes', if you bought in at $300 the stock price can just keep going up without bound. Can you clarify why these are different?
- LeifCarrotson 5y ago
  If you win $300, good for you, if you win $430,000, that's even better for you, but the market doesn't really care which way that goes. However, if you lose $300 that you brought to the table, that's your problem, too bad for you. If you lose $430,000 when you only brought $300 to the table, that's beyond being just your problem, that's the system's problem. A system which allows this situation to happen is fundamentally flawed, it's vulnerable to exploitation and collapse if this kind of behavior allowed to go on unchecked.

ska 5y ago

Sure, they have an inverse relationship, but the implications are really different.

greycol 5y ago

If you need to cover your short and there are no shares being sold you effectively must keep offering higher and higher prices until someone will sell you a share as you are legally obligated to buy a share[1]. To end the unlimited downside (of raising the price you'll pay by more and more) you need to have enough sell orders on the books to cover your short or have raised the price enough for someone to sell. During the time you are trying to buy your loss is increasing (as you raise the price to get a seller) and is unbounded. If you have a stock you have to sell and there are no offers to buy on the books you can't offer to sell then keep raising the price, instead you would need to keep lowering the price. The price is either limited by what's on the books, or you need to wait an indeterminate amount of time for some one to buy at the price you are selling. During this time you are trying to sell your profit is decreasing (as you lower the price to get a buyer) and bounded by $0 (for a limited liability company). So while it's true that if you hold a stock indefinitely the value you could get is unlimited with a short the value you could lose could be unlimited over a much shorter time frame. [1] Whether you actually need to cover your shorts may be a matter of some debate if you look at the wild rumors around GME

greycol 5y ago

As a sister to my comment I'll also add you can effectively (though not legally) short more stock than you can buy. This is because to short you pay for a stock at the current market price with the promise to sell it back at the same price to the lender at a future date. If you then immediately sell the stock you can use that money to immediately pay to borrow another stock. This means with the cash it takes to buy 1 share you can short as many shares as someone will lend which can multiply your loss to more than you have.