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Buying on What Is Selling Short is Risky
June 30th, 2009 by admin
When you want to buy stocks with borrowed money you can be exposed to an extremely risky deal considering that while the potential for greater profit exists; the potential for greater losses is likewise incumbent. This is what is selling short implies. So an investor that makes money by buying security that is selling short is also known as “buying on margin” for it subjects the investor to the risk of interest payment for the use of the loan. To put it in another way, in selling short an investor borrows shares, sells them and returns the same shares whether he has made profit or not. Now, if he has gained from this transaction he will obviously go home with money in his pocket, but if the transaction has failed he will go home broke with the obligation to pay interest for the money he has borrowed. Therefore, investors doing this sort of deal must have to have good heart conditions.
