Word of the Week!
Wednesday, February 20th, 2008The word of the week for this week is short sale. A short sale takes place when an investor feels that a stock will drop in value. When an investor shorts a stock, they are selling shares of stock that they do not own. They hope to later buy back the shares at a lower price and return them to the broker. In order to short sell, one must create a margin account with their broker. This can be a very risky investment since the potential loss is unlimited.
Here is an example of a short sale. On January 2nd, 2008 an investor feels that shares of AAPL (Apple) are overpriced at their closing price of $194.84. He initiates a short sale of 100 shares through his margin account with his broker. His account will be credited with ($194.84 x 100 shares = $19,484). On February 19th, the investor repurchases the 100 shares at the closing price of $122.18/share. This costs the investor ($122.18/share x 100 shares = $12,218). His profit over this 1 1/2 month period of time is ($19,484 - $12,218 = $7,266) even though the price of AAPL dropped by over $72!
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