I think you misunderstood what I meant by "your money" in "double your money" (and I was unclear). You can only earn the value of the stocks you borrow. When trading long, the gain is unlimited.
According to Investopedia, "the Federal Reserve Board requires all short sale accounts to have 150% of the value of the short sale at the time the sale is initiated" so it's the same principle as going long with margin. You can leverage yourself but there's a limit.
You borrow 10 shares that are currently worth $10 each. You immediately sell and get $100.
The price drops to $1 per share. You spend $10 to buy those shares and return your loan.
So you spent $10 and made $90. That's a 9x gain.
Yes you cannot make more than $100. But of course you can! Do the short on 1000 shares instead of 10.
The more confident you are of the share price going down, the more shares you borrow. Unlimited upside.
Isn't this a bit like arguing that you can make infinite money by borrowing infinite money and going long? You have to maintain margin requirements which limits how many shares you can borrow so again, you can really only double your money (not even double, iiuc your account has to have 150% of the value of your short), unless there's something I'm not seeing.
> your account has to have 150% of the value of your short
yep, people who aren't professional traders, and don't actually have an account with a broker to do shorting with, and dont know the margin requirements.
The thing is, a broker will _never_ put themselves at risk of losing money. If they offer you a shorting service, they require a method to make themselves whole. If you short, they will guess some sort of margin of safety for said short (calculated based on the liquidity of the stock) - if it's very liquid, the margin could be lower, but for illiquid stocks, it's even higher. This margin of safety is what the broker will use to close your short position if the market moves against you - you don't get a choice in the matter. You don't even have access to those funds from the sale of the short - the broker holds onto it until the short is closed.
The same argument can be made with roulette. Just place all your money on black and assume you'll win each time.
You need to put up a lot more than $10 to do that borrow. Quite limited upside.
uhh, no. When trading long your gain is limited by the depth of the order book. Stock price isn't relevant if there are 3 buyers out there looking to buy 2 shares each and you're sitting on 100,000 shares
The order book refills over time and normal humans will never exhaust it.
Yes, but borrowing short is fundamentally leveraged. As long as the stock doesn't increase in value, you don't need much of your own cash to secure it - because you're holding the cash from selling it.
But, of course, that gets ugly when the stock goes up; that's when you have to start putting your own money in against the borrow.