5 ms·

To add to this, just remember one simple fact: When you are a long a stock, the most you can lose is the amount you paid. When you are short, you can lose unlim

To add to this, just remember one simple fact: When you are a long a stock, the most you can lose is the amount you paid. When you are short, you can lose unlimited money.

giarc 13y ago
I don't trade stocks, nor do I claim to know that business at all. Can you explain this concept?
- bcbrown 13y ago
  A short is borrowing stock to sell, promising to re-buy that stock in the future to give back to the lender. The stock price can rise arbitrarily high, which means you may have to pay an arbitrarily high price to re-purchase the stock in the future. See "short squeeze" and read about the Volkswagen/Porsche example a couple years back.
- scotch_drinker 13y ago
  If you buy a stock at 10 and it goes to zero (the bottom limit), all you lose is your $10. If you short a stock (thinking it's price will go down), there is no upper limit on how far it can go up. If it continues to go up, you're going to lose the amount of money at which you eventually "buy to cover". For example, if you hold your short until the price is $100, you lose $90.
  - giarc 13y ago
    Could you not hold forever?
    - minimax 13y ago
      No. As the value of the position (price times size) approaches the cash balance in your brokerage account, your broker will close out your position (buying back the shares) using the funds in your account. This is known as a "margin call."
- ceejayoz 13y ago
  Shorting is selling a stock you don't own. You have to purchase it back (called "covering") later. If it goes down, you keep the difference between what you sold it for and what you had to repurchase it at. If the price goes up, though, you still have to buy it back. As a share's price technically has no upper limit, you could wind up in the situation where you sold a share for $10, intended to purchase it back at something like $5, but wind up having to purchase it back at $10,000,000/share because they accidentally invented an AI.
  - giarc 13y ago
    Do you have/Do you get to set limits on it? For example, automatically buy back if it reaches $15?
    - minimax 13y ago
      Yes that's called a stop loss order.
    - troels 13y ago
      You could always place a purchase order to execute if the stock rises to $15.
grmarcil 13y ago
@giarc: Shorting consists of borrowing as asset from someone to sell at the current market price and hoping it goes down in value, so you can buy it back for less that you sold it and then return the asset to its owner. In this scenario, you take the difference in price, less the premium you paid the owner for the right to borrow. To give an example, say stock A is trading at $100, but you think it is going to fall. Say you find someone who is willing to let you borrow a share of stock A for a week for the premium of $1. You agree, and then immediately sell this share back to the market for $100. You now have $99. If the stock falls, as you hope it does, say to $90, you spend $90 to repurchase the share and return it. You now earned $9 on a short. Consider the opposite scenario: you short, but the price goes up. Again, borrowing a share of stock A for $1, trading at $100. You sell that share to the market and wait for the price to fall, so you can buy and return. But, suddenly the market learns that company A is insanely profitable in a previously unknown way, and the price of the stock skyrockets. At the end of the borrowing term, you are obligated to return a share of stock A to the person you borrowed from. How much will you have to pay to get it back? This is theoretically unlimited, depending on how high the market goes. If the market goes to $200, you have lost $101 on the short. If the market goes to $200,100 (and does not fall below this before the end of the borrowing term), you have lost $200,001 on the short. Now imagine you have borrowed a LOT of shares on high leverage (value of what you borrow exceeds what you actually have on hand to pay it back) and you can see how shorting and being wrong can wipe you out. Good point from svachalek[https://news.ycombinator.com/item?id=6690938 https://news.ycombinator.com/item?id=6690938] below: if the borrowed stock rises high enough, eventually the lender is going to margin call you.. http://www.investopedia.com/ask/answers/05/shortmarginrequirements.asp http://www.investopedia.com/ask/answers/05/shortmarginrequir...

To add to this, just remember one simple fact: When you are a long a stock, the most you can lose is the amount you paid. When you are short, you can lose unlimited money.

giarc 13y ago

I don't trade stocks, nor do I claim to know that business at all. Can you explain this concept?

bcbrown 13y ago
A short is borrowing stock to sell, promising to re-buy that stock in the future to give back to the lender. The stock price can rise arbitrarily high, which means you may have to pay an arbitrarily high price to re-purchase the stock in the future. See "short squeeze" and read about the Volkswagen/Porsche example a couple years back.
scotch_drinker 13y ago
If you buy a stock at 10 and it goes to zero (the bottom limit), all you lose is your $10. If you short a stock (thinking it's price will go down), there is no upper limit on how far it can go up. If it continues to go up, you're going to lose the amount of money at which you eventually "buy to cover". For example, if you hold your short until the price is $100, you lose $90.
- giarc 13y ago
  Could you not hold forever?
  - minimax 13y ago
    No. As the value of the position (price times size) approaches the cash balance in your brokerage account, your broker will close out your position (buying back the shares) using the funds in your account. This is known as a "margin call."
ceejayoz 13y ago
Shorting is selling a stock you don't own. You have to purchase it back (called "covering") later. If it goes down, you keep the difference between what you sold it for and what you had to repurchase it at. If the price goes up, though, you still have to buy it back. As a share's price technically has no upper limit, you could wind up in the situation where you sold a share for $10, intended to purchase it back at something like $5, but wind up having to purchase it back at $10,000,000/share because they accidentally invented an AI.
- giarc 13y ago
  Do you have/Do you get to set limits on it? For example, automatically buy back if it reaches $15?
  - minimax 13y ago
    Yes that's called a stop loss order.
  - troels 13y ago
    You could always place a purchase order to execute if the stock rises to $15.

grmarcil 13y ago

@giarc: Shorting consists of borrowing as asset from someone to sell at the current market price and hoping it goes down in value, so you can buy it back for less that you sold it and then return the asset to its owner. In this scenario, you take the difference in price, less the premium you paid the owner for the right to borrow. To give an example, say stock A is trading at $100, but you think it is going to fall. Say you find someone who is willing to let you borrow a share of stock A for a week for the premium of $1. You agree, and then immediately sell this share back to the market for $100. You now have $99. If the stock falls, as you hope it does, say to $90, you spend $90 to repurchase the share and return it. You now earned $9 on a short. Consider the opposite scenario: you short, but the price goes up. Again, borrowing a share of stock A for $1, trading at $100. You sell that share to the market and wait for the price to fall, so you can buy and return. But, suddenly the market learns that company A is insanely profitable in a previously unknown way, and the price of the stock skyrockets. At the end of the borrowing term, you are obligated to return a share of stock A to the person you borrowed from. How much will you have to pay to get it back? This is theoretically unlimited, depending on how high the market goes. If the market goes to $200, you have lost $101 on the short. If the market goes to $200,100 (and does not fall below this before the end of the borrowing term), you have lost $200,001 on the short. Now imagine you have borrowed a LOT of shares on high leverage (value of what you borrow exceeds what you actually have on hand to pay it back) and you can see how shorting and being wrong can wipe you out. Good point from svachalek[https://news.ycombinator.com/item?id=6690938 https://news.ycombinator.com/item?id=6690938] below: if the borrowed stock rises high enough, eventually the lender is going to margin call you.. http://www.investopedia.com/ask/answers/05/shortmarginrequirements.asp http://www.investopedia.com/ask/answers/05/shortmarginrequir...