Short Position
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A short position is a position designed to benefit when the price of the traded instrument falls. In a traditional stock short sale, shares are borrowed and sold, with the intention of buying them back later and returning the borrowed shares.
Basic Mechanics
If we short 100 shares at 50 and later buy them back at 45, the price movement is 5 per share before costs and borrowing expenses. If we must cover at 60, the price movement is negative by 10 per share.
Short positions have important differences from long positions. A stock can theoretically rise without a fixed upper limit, so the potential loss on a traditional short position is not limited in the same way as on a fully paid long stock position.
Key Terms
Short position, short sale, borrow, cover, short exposure, borrow cost.
Knowledge Check
- What does a short position generally benefit from?
- What is the basic sequence in a traditional stock short sale?
- Why can short risk be fundamentally different from long stock risk?