's Week 4-#5-2 - Short Selling sell shares you dont own...

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Short Selling sell shares you don’t own - borrow from broker Example: ABC selling at $70/share You expect a drop in price and sell short 100 shares broker lends you 100 shares of ABC sells @ $70 x 100 = $7,000 - left as collateral deposit another 50% market value as collateral short deposit = 150% of stock shorted = $7,000 + 3,500 = $10,500 total short deposit
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market price drop to $55 decide to ‘cover’ short position buy 100 shares of ABC @ $55 = $5,500 shares go back to broker - investor gets back collateral Profit: proceeds from sale $7,000 cost of covering 5,500 gross profit $1,500 less: 2% OUT 140 2% IN 110 $1,250
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Risks Associated With Short Selling: agreement may be terminated by either party at any time dividends declared are the responsibility of the short seller Theoretically no limit to the amount of money an investor can lose Why? No limit to the amount by which the price of a shorted stock can increase
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This note was uploaded on 11/25/2010 for the course BUSINESS BU111 taught by Professor Yost during the Fall '10 term at Wilfred Laurier University .

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's Week 4-#5-2 - Short Selling sell shares you dont own...

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