Use this calculator to estimate the potential profit or loss from a short selling transaction, taking into account commissions and borrow fees.
Understanding Short Selling
Short selling is an investment strategy where an investor borrows shares of a stock and sells them on the open market, expecting to buy them back later at a lower price. The goal is to profit from a decline in the stock's price. If the price drops, the investor buys back the shares at the lower price, returns them to the lender, and pockets the difference.
How Short Selling Works
Borrow Shares: You borrow shares from a broker, who typically lends them from their own inventory or from other clients' margin accounts.
Sell Shares: You immediately sell these borrowed shares on the open market at the current price.
Wait for Price Drop: You hope the stock's price declines.
Buy Back (Cover): If the price drops, you buy back the same number of shares at the lower price. This is called "covering" your short position.
Return Shares: You return the purchased shares to the broker from whom you borrowed them.
Profit/Loss: Your profit is the difference between the price you sold the shares for and the price you bought them back for, minus any commissions, borrow fees, and other costs. If the price rises instead of falls, you incur a loss.
Key Factors in Short Selling
Short Sell Price: The price at which you initially sold the borrowed shares. A higher sell price relative to the cover price is better.
Cover Buy Price: The price at which you buy back the shares to close your position. A lower buy price relative to the short sell price is better.
Number of Shares: The quantity of shares involved in the transaction.
Commissions: Fees charged by your broker for executing the sell and buy orders. These can significantly impact profitability, especially for smaller trades.
Borrow Fees: When you short sell, you are borrowing shares. The broker may charge a fee for lending these shares, often expressed as an annualized percentage of the value of the shorted stock. This fee accrues daily for as long as you hold the short position. Stocks that are difficult to borrow (e.g., those with high short interest) tend to have higher borrow fees.
Days Held Short: The longer you hold a short position, the more borrow fees you will accumulate.
Risks of Short Selling
Short selling is considered a high-risk strategy because the potential for loss is theoretically unlimited. While a stock's price can only fall to zero (limiting your profit), it can rise indefinitely (leading to unlimited losses). Additionally, short sellers may face margin calls if the stock price rises significantly, requiring them to deposit more funds into their account.