You have decided to short sell one share of a stock that currently sells on the market for $25. The most you can make from this trade is: A. An infinite amount B. $50 C. $25 D. $25 minus the lending fee you pay to the broker.
Question
You have decided to short sell one share of a stock that currently sells on the market for 50 C. 25 minus the lending fee you pay to the broker.
Solution
When you short sell a stock, you borrow the stock and sell it immediately at its current price, hoping to buy it back later at a lower price, return the borrowed shares, and pocket the difference.
Here's how we can calculate the maximum profit from this trade:
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Sell the Stock: You short sell one share of a stock that currently sells on the market for 25 from the sale.
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Buy Back the Stock: The best-case scenario for you is that the stock price drops to $0. In this case, you would not have to pay anything to buy back the stock.
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Return the Stock: You return the borrowed stock to the lender. Since you didn't have to pay anything to buy back the stock, you keep the entire $25 from the initial sale.
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Calculate the Profit: The maximum profit you can make is the initial sale price of the stock. However, you also have to account for the lending fee you pay to the broker for borrowing the stock. Therefore, the maximum profit is $25 minus the lending fee.
So, the correct answer is:
D. $25 minus the lending fee you pay to the broker.
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