Short Selling - An Unprofitable Example
A rise in the price of the stock can be disastrous!
Consider the same example. A team short sold 1,000 shares at $50 on turn 12, except on turn 17, the price has risen from $50 to $60.
When the position is covered, they must purchase the 1,000 shares for $60,000. The sale proceeds of $50,000 are used, plus $10,000 taken from their margin account.
At the end of turn 17, they'll receive only $15,000 of the $25,000 used for their margin account on turn 12.
Remember too, that these numbers did not include commissions and the lending fee. With a commission of 1.25%, it cost the team $625 to sell the stock on turn 12 and $750 to cover on turn 17. There was also the lending fee which can run anywhere from 3% to 10%. Assuming a 5% lending fee, that's an additional $2,500, giving a total of $3,875 in commissions and fees, putting their total loss at $13,875!