Short selling: How does it work?
Short selling consists in selling securities you do not own, because you anticipate their value to drop, with the aim to buy them back at a lower cost and realize a capital gain.
This type of transaction is suitable only for seasoned investors with very high risk tolerance levels and the financial resources to maintain the required margins.
Example of a short sale:
Robert strongly believes that the share value of Company ABC will shortly drop drastically. He does not hold this stock in his portfolio, but would like to take advantage of this potential decline. How? He can short sell 1,000 shares at a given price.
To do so, Robert needs a minimum credit balance of 130%. So, for 1,000 shares trading at $10 each, the balance required would be $13,000. To that, he needs to subtract the product of the short sale, i.e., $10,000. Robert is therefore asked to contribute with an investment of $3,000.
Be careful though… short selling carries certain risks, including:
- The potential for an immediate repurchase if the shareholder decides to buy back the securities, which can occur and is particularly risky if you, as the seller, cannot acquire more securities to pay them back to the owner.
- The seller (the person borrowing the securities) is responsible for paying dividends to the real stockholder.
- The loss is potentially unlimited.
For more information on short selling, do not hesitate to contact one of our representatives.
The use of borrowed money to finance short selling of securities involves greater risk. When borrowing money to sell securities short, you are required to repay the loan, including its cumulating interests, in accordance with its terms, even if the value of the securities changes. Fees may be charged for securities loans in short sales. These fees vary based on the markets and without prior notice. Contact one of our representatives for more information on these fees.