4 ms·

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

by giarc 13y ago

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.

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

by giarc 13y ago

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

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.