Forex

Investors usually play the market hoping that the financial instruments
(in our case stocks) they purchase will go up in price. This
concept in the Wall Street jargon is called going long. Of course,
there is an old practice of making bets against what most investors
hope for. This practice is known as shorting, and theoretically, it can
produce unlimited losses, as will be demonstrated in the following
examples.
The best scenario: You borrow a stock from your broker that is
currently valued at $10 per share, believing its price is outrageously
high and absurd. You then sell this borrowed stock on the open
market and collect your $10 minus the commission. You hope this
stock will go down in price, and your dream comes true. Let’s say
that within 6 months the company declares bankruptcy, and you
purchase the stock back for pennies. Literally and happily, you give
it back to your broker, who lent you that stock when it was riding

high at $10. When all is said and done, you have managed to make
almost 100 percent profit minus commission. Let’s estimate that at
95 percent, which is not bad for a 6-month return.
After this triumph, you feel smart and go hunting for the next
overpriced stock, which brings us to our next point.
The worst scenario: You borrow a stock priced at $10, believing
it to be overvalued. You then sell this stock on the open market and
collect your $10 minus commission. Now you wait for your stock
to drop in price. Only this time your dream crumbles. Within the
next 6 months, the company declares record earnings (perhaps
they have found a cure for cancer) and the stock soars. To safeguard
yourself from the unlimited potential loss, you purchase this
stock back for $100, at ten times what you have paid for it, and
reluctantly give it back to your broker. In the end you lose 900 percent
plus commission. These are dreadful numbers for only 6
months of activity.
Indubitably, these two examples are extreme, but they are educational
nonetheless. When you short stocks, you expose yourself
to a possible loss of astronomic proportions.