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BrainChip Taps Former ARM Executive Antonio J. Viana as Non-Executive Director, page-16

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mkm109

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28/06/21

16:46

Post #: 54124392
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Originally posted by Worker101: ↑

Why you should never short a stock.

Short Selling Risk vs. Reward
A fundamental problem with short selling is the potential for unlimited losses. When you buy a stock (go long), you can never lose more than your invested capital. Thus, your potential gain, in theory, has no limit.

For example, if you purchase a stock at $50, the most you can lose is $50. But if the stock rises, it can go to $100, $500, or even $1,000, which would give a hefty return on your investment. The dynamic is the exact opposite of a short sale.

If you short a stock at $50, the most you could ever make on the transaction is $50. But if the stock goes up to $100, you'll have to pay $100 to close out the position. There's no limit on how much money you could lose on a short sale. Should the price rise to $1,000, you’d have to pay $1,000 to close out a $50 investment position. This imbalance helps to explain why short selling isn't more popular than it is. Wise investors are aware of this possibility.

Time Works Against a Short Sale
There's no time limit on how long you can hold a short position on a stock. The problem, however, is that they are typically purchased using margin for at least part of the position. Those margin loans come with interest charges, and you will have to keep paying them for as long as you have your position in place.

The interest charged functions as something of a negative dividend, in that it represents a regular reduction in your equity in the position. If you're paying 5% per year in margin interest, and you hold the short position for five years, you'll lose 25% of your investment just from doing nothing. That stacks the deck against you. You won't be able to sit on a short position forever.

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One more negative you didn’t mention:
if the company issues a dividend while you are shorting the stock you will not get any of it. If you go long you will get the different.

BRN Price at posting: 52.5¢ Sentiment: Buy Disclosure: Held
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BrainChip Taps Former ARM Executive Antonio J. Viana as Non-Executive Director, page-16

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BrainChip Taps Former ARM Executive Antonio J. Viana as Non-Executive Director, page-16

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