Comment by BeetleB

3 days ago

You borrow 10 shares that are currently worth $10 each. You immediately sell and get $100.

The price drops to $1 per share. You spend $10 to buy those shares and return your loan.

So you spent $10 and made $90. That's a 9x gain.

Yes you cannot make more than $100. But of course you can! Do the short on 1000 shares instead of 10.

The more confident you are of the share price going down, the more shares you borrow. Unlimited upside.

4 comments

BeetleB

Reply
tines  3 days ago

Isn't this a bit like arguing that you can make infinite money by borrowing infinite money and going long? You have to maintain margin requirements which limits how many shares you can borrow so again, you can really only double your money (not even double, iiuc your account has to have 150% of the value of your short), unless there's something I'm not seeing.

  • chii  3 days ago

    > your account has to have 150% of the value of your short

    yep, people who aren't professional traders, and don't actually have an account with a broker to do shorting with, and dont know the margin requirements.

    The thing is, a broker will _never_ put themselves at risk of losing money. If they offer you a shorting service, they require a method to make themselves whole. If you short, they will guess some sort of margin of safety for said short (calculated based on the liquidity of the stock) - if it's very liquid, the margin could be lower, but for illiquid stocks, it's even higher. This margin of safety is what the broker will use to close your short position if the market moves against you - you don't get a choice in the matter. You don't even have access to those funds from the sale of the short - the broker holds onto it until the short is closed.

  • sidewndr46  3 days ago

    The same argument can be made with roulette. Just place all your money on black and assume you'll win each time.