Transcript: CIBC Investor’s Edge — How to calculate your gain or loss when short selling

[Title Name: Rob - CIBC Investor’s Edge employee.]

[Music playing.]

[CIBC logo. CIBC Investor’s Edge: How to calculate your gain or loss when short selling. An open laptop is shown with a line graph on the screen. The screen scrolls to show another line graph and bar graph.]

[Rob, a CIBC Investor’s Edge employee, stands in front of a wall with the CIBC logo on it and speaks.]

Rob: How to calculate your gain or loss when short selling. You just short sold the stock, meaning you borrowed some stock from someone else and then you sold it.

But you know, at some point you'll have to return that stock to the lender. You can do that when you choose or wait for the lender to come and ask for it back.

[Line graph titled: “Example of a profit on a short sale”. There’s a blue box that explains it’s the “Share price”. On the left side are dollar amounts: $14, $16, $18, $20. The graph line moves up and down with an overall upward trajectory. A dotted line at $20 is labelled “Short sell: 500 shares at $20 per share”. The graph line then drops to $16 as the timeline moves further and is labelled “Repurchase: 500 shares at $16 per share”. The area between the short sell and the repurchase points are shaded out and labelled “Profit equals $4 per share. 4 times 500 shares equals $2,000 total profit”.]

Imagine you sold short and then you bought back the shares and covered your short sale. Let's calculate your potential gain or loss on this trade.

Imagine that you sold 500 shares here, and you're buying them back here. Your profit is the difference between the two prices, times the number of shares you hold.

[Line graph titled: “Example of a loss on a short sale”. On the left side are dollar amounts: $18, $20, $22, $24. The graph line starts at $22 and moves up and down with an overall downward trajectory. A dotted line at $20 is labelled “Short sell: 500 shares at $20 per share”. The graph line then moves up to $23 as the timeline moves further and is labelled “Repurchase: 500 shares at $23 per share”. The area between the short sell and the repurchase points are shaded out and labelled “Loss equals $3 per share times 500 shares, equals $1,500 total loss”.]

On the other hand, this can also happen. You sell 500 shares here, and you have to buy them back here. In this case, you'll take a loss, which again, is the difference between the two prices times the number of shares you shorted. $3 times 500 shares is $1,500, your total loss.

[Line graph titled: “Risks on a short sale”. On the left side are dollar amounts: $0, $2, $4, $6, $8. The graph line starts at $0, moves up and down erratically, sometimes dipping down to $0, which is circled in red. The graph line then rises sharply, ending over $51,200.]

Now, one of the biggest risks to short selling comes from the fact that while a stock can fall to zero, but no further, in theory, there's no limit to how high it can rise.

The rise can happen unexpectedly and could be a reaction to some positive news that's released when markets aren't open. The news could be a takeover, a change in a law that benefits the company, great earnings results, or maybe some unforeseeable development.

[Line graph titled: “Runaway gap example”, which shows share prices of a company. On the left side are dollar amounts: $18 to $20 to $22, $24. The graph line starts at $19 and moves up and down erratically. The graph line stops at $18 and then immediately starts again at $23. This is labelled “Runaway gap”.]

The exchange often halts trading on a stock if news is pending during market hours, and the buying pressure can build until the stock reopens with a big gap to the upside. This is a danger for short sellers, and you’ll want to carefully consider this possibility as you create your trading plan.

In part three, we'll look at how to calculate margin for short selling.

[CIBC Investor’s Edge is a division of CIBC Investor Services Inc. This document is provided for general informational purposes only and does not constitute investment advice. The information contained in this document has been obtained from sources believed to be reliable and believed to be accurate at the time publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. The CIBC logo is a registered trademark of CIBC. The material and its contents may not be reproduced without the express written consent of CIBC.]

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