Theoretically my losses are unlimited – because there is no defined ceiling on how far a share can rise. I’ve sold the share I borrowed at £10 but if the value increases to £100, I’ll have to spend £100 in order to give a share back to the person I borrowed from. If my prediction is incorrect and StuffCo’s shares go through the roof, I’m in big trouble. I have pocketed £5 by correctly anticipating the fall in the share price. They get their share back and I’ve still got the £10 I sold it for, minus the £5 I had to pay to replace it. So I wait for the StuffCo share price to fall to £5, then buy it and return one share to the person I borrowed from in the first place. I no longer have the share I borrowed but I will have to give it back at an agreed time. If I sell it straight away, that puts £10 in my pocket. If I expect the share price to fall (because I think it is a rubbish business: badly run, for instance, or selling outdated products), I can borrow a share in StuffCo from someone who has it, in return for a small fee. If the price rises to £15, I can then sell my stock for a profit of £5 per share. If I believe the share price is going to rise, I’ll simply buy shares at £10. Let’s say StuffCo (a made-up company) has a share price of £10. It’s a way of making money by betting that a company’s share price will fall. But a good place to start is by understanding what short-selling is – and how the Wall Street wizards who do it could end up being wrong-footed by a group of amateur traders.
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