SIE practice questionmediumShort Selling
An investor sells short 100 shares of XYZ at $60 per share. If the stock drops to $40, what is the investor's profit before commissions?
- A$6,000
- B$1,000
- C$2,000✓ Correct answer
- D$4,000
Explanation
Why C — $2,000
In a short sale, the investor borrows shares and sells them, hoping to buy them back later at a lower price. Selling at $60 and buying back at $40 yields a $20 per share profit. 100 shares x $20 = $2,000. Short sellers profit when prices fall. If the price had risen instead, the short seller would face a loss — with theoretically unlimited loss potential since there is no cap on how high a stock can go.
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