Chapter © 2010 South-Western, Cengage Learning Short Sell

© 2010 South-Western, Cengage Learning SLIDE 2 Chapter 12 Lesson 12.1 Evaluating Stocks Standard 4.0 Investigate opportunities available for saving and investing. 4.3Evaluate methods of investing. a. Stocks and Bonds GOALS Describe features of stock and types of stocks. Explain how to value a stock and decide a fair price to pay for a stock purchase.

© 2010 South-Western, Cengage Learning SLIDE 3 Chapter 12 Sell Short Short selling is selling stock borrowed from a broker that must be replaced at a later time. To sell short, you borrow a certain number of shares from the broker. You then sell the borrowed stock, knowing that you must buy it back later and return it to the broker. You are betting that the price will drop, so that you can buy it back at a lower price than you sold it for, thus making a profit.

© 2010 South-Western, Cengage Learning Going short Because you’re smart you realize Samsung Galaxy is better than iPhone and Tim Cook is no Steve Jobs. So you borrow 100 shares of Apple stock from your broker and short sell in its peak in 2012 for $705 per share. You take in $70,500. You hold your position until Jan and buy back 100 shares to replace the borrowed securities at $435 per share. Cost is $43,500. You net $27,000!!! Only regret, Capital gains tax increased in SLIDE 4 Chapter 12

© 2010 South-Western, Cengage Learning Short including broker fee 100 shares Apple at 70570,500 Broker fee at 1% 705 Net from sell69,795 Buy back Broker fee 1% 435 Total cost Net before taxes $25,860 SLIDE 5 Chapter 12

© 2010 South-Western, Cengage Learning Long vs. short Long loss limited Only lose amount invested $10 per share x 100 shares = $1,000 exposure Short loss unlimited Short Sell -- $10 /share x 100 shares = $1,000 net Short Cover -- $100/ share x 100 shares = $10,000 loss SLIDE 6 Chapter 12