Question

Suppose you short sell a stock at price $40. If you close the position at $20, your profit is $_______. If you close the position at $45, your loss is $_____.

Can someone explain how I would go about figuring this out?

Answer 1

Short selling of a stock happens when investor thinks that the price of the stock is going to decline in near future. The investor borrows the stock and sells it at high price and when the price of stock decline; investor close the position by buying the stock back and returning the borrowed stock. The difference in the selling price and purchase price at the time of closing the position is the profit of investor but if the price at the time of closing the position is more than the selling price then the investor makes a loss.

Suppose you short sell a stock at price $40. If you close the position at $20, your profit is

= Selling price – Purchase price at the time of closing the position

= $40 - $20 = $20

Therefore your profit is $20

If you close the position at $45, your loss is

= Selling price – Purchase price at the time of closing the position

= $40 - $45 = - $5 (negative sign is for loss)

Therefore your loss is $5

Suppose you short sell a stock at price $40. If you close the position at $20, your profit is $20. If you close the position at $45, your loss is $5.