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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
by 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 agoWhat? 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 agoAnd how is this different from saying that holding the stock you bought at $300 giving you +150000%? perhaps you missed GP intention?
- ac29 5y agoThe 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 agoIs there a max limit on how much a stock can go up?
- vasco 5y agoThere 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 agoOK, 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 agoIf 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.
- dwaltrip 5y agoDoes that ever actually happen? I thought that a margin call would come far before it reached that point, limiting the damage to any of the involved parties.
- zaat 5y agoHence there are checks and defense mechanisms in place, and a risky short position (meaning position with loss over the credit given to the position holder) will be closed by the bank/broker. Those guys in finance and regulations have been here before we were born, they managed to cover most basic stuff by now.
- burnished 5y agoI get that, but it sounds like you are answering the question you wanted to instead of "what does unlimited mean if that loss is an unlimited downside but holding a stock is not called unlimited upside".