's Week 5-#2-1 - Selling Short • How do you make money on...

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Unformatted text preview: Selling Short • How do you make money on investments? • buy low and sell high = sell high and buy low • How could you sell first and buy later? • sell shares you don’t own • How can you sell shares you don’t own? • borrow them from broker Selling Short RULES: • short sale must be declared • short sale price governed by ‘last sale’ rule • total in short account must always = 150% CMV • agreement may be terminated by either party at any time - forced to cover / “buy-in” • dividends declared are the responsibility of the seller Example: ABC selling at $70/share, You expect drop in price, short 100 shares • broker lends you 100 shares • sell @ $70 x 100 = $7,000 - left in account • sale commission = $7,000 x 2% = $140 • deposit another 50% market value as collateral = $3,500 Total in short account = 150% of stock shorted = $7,000 + 3,500 = $10,500 total in short account 2 months later, market price drops to $55 You decide to ‘cover’ short position • buy 100 shares of ABC @ $55 = $5,500 • purchase commission = $5,500 x 2% = $110 • shares go back to broker - investor gets back additional collateral (50% deposit) • Capital Gain : proceeds from sale $7,000 cost of covering 5,500 gross profit $1,500 less: commissions 250 $1,250 Calculation of Tax Payable on Short Sale • Assume combined marginal tax rate of 32.98%… Capital Gain $1,250.00 Taxable Capital Gain 625.00 (50%) x 32.98% $ 206.13 • After-tax return: $(1,250 – 206.13)/3,500 = 29.82% “Short” Call...
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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 5-#2-1 - Selling Short • How do you make money on...

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