Chapter 14: Buying on Margin and Selling Short

Last updated
Save as PDF

Page ID: 79446

\( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\)

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Learning Objectives

In this chapter, you will

Explore the differences between cash accounts and margin accounts
Examine the technique of buying on margin which entails borrowing money to buy securities, typically stocks
Discuss the use of buying on margin to magnify investment returns and the potential adverse results
Examine the technique of selling short, also known as shorting stocks
Discuss the use of shorting stocks to profit from falling prices and the potential significant adverse results
Explore the phenomenon known as a “short squeeze”

By the end of this chapter, you should be able to

Explain the technique of buying on margin and its potential advantages and disadvantages
Calculate various profit and loss results from various buying on margin scenarios
Explain the technique of selling short, also known as shorting stocks, its potential advantages, and its significant potential pitfalls
Calculate various profit and loss results from various selling stocks short scenarios
Identify potential “short squeeze” situations and how a prudent, long-term investor can take advantage of such situations

As if options contracts and future options were not bad enough, the investment world has two more strategies to help separate you from your money, aye!, I mean increase your wealth through speculative transactions. (Have I ever mentioned that I am not very popular with many brokers?) In this chapter, we discuss buying on margin and selling short. Both involve borrowing from your broker. Both have significant risks. And as we have said in the past, instruction about syphilis is not an instruction to get syphilis. Okay, okay, maybe someday down the line, you may find a suitable situation for buying on margin. But selling short is downright dangerous. It’s right up there with futures contracts. Let’s see if we can scare you away from selling short for good!

Presentation file - Study guide

14.1: Buying on Margin
Let's see how we can magnify our gains -- and magnify our losses! -- with the technique known as buying on margin. Yet another way to separate you from your hard-earned money.
14.2: Selling Short
Okay, Fun Seekers! Just wait until you learn how to lose theoretically unlimited amounts of money by selling short!
14.S: Summary
Congratulations ‒ You Have Finished Chapter 14 ‒ Buying on Margin and Selling Short

"Horse Racing Betting Slip" by ATTRIBUTION: beatingbetting.co.uk is licensed under CC BY 2.0