Short selling or shorting in finance is when the inverter makes a profit if the value of the share falls.
Formulas:
Number of shares sold short = (Initial Investment ÷ Initial Equity) ÷ Initial Share Price
Capital gain on share = Number of shares sold short x ( Initial Share Price - Ending Share Price)
Dividends paid = Cash Dividends per Share x Number of shares sold short
Net income = Capital Gain - Dividends Paid
| Net income |
| Initial Investment |
Margin based on ending price = [Initial Investment + ( Initial Share Price x Number of shares sold short) - Dividends Paid - ( Number of shares sold short x Ending Share Price)] ÷ (Number of shares sold short x Ending Share Price)
Price for margin call = [Initial Investment + ( Initial Share Price x Number of shares sold short) - Dividends Paid] ÷ [Number of shares sold short x (1 + Maintenance Margin%)]
Simple example: An investor believes that bitcoin (can be stock, assets, or any cryptocurrency), which is currently trading at $50,000 will fall in the next months, so the investor borrowed 2 bitcoin and sold them immediately. means this investor is short 2 bitcoin since he sold the 2 BTC. One month later bitcoin fall to $35,000, the investor decides to close the short position and buy 2 bitcoin to replace the borrowed bitcoin.
The investor trading profit on the short sale, excluding commissions and interest on the margin account = 2 x (50000 - 45000) = $10,000