Page 19 - CL Armchair Case

PHISSONS: SHORTING EXAMPLE

Phissons is used here to explain how shorting works

Shares in Phissons plc. currently trade at $10 per share.

1. A short seller investor borrows from a lender 100

shares of Phissons plc. and immediately sells them for
a total of $1,000.

2. Subsequently, the price of the shares falls to $8 per

share.
3. Short seller now buys 100 shares of Phissons plc. for

$800.

4. Short seller returns the shares to the lender, who must
accept the return of the same number of shares as was

lent despite the fact that the market value of the shares

has decreased.

5. Short seller retains as profit the $200 difference (minus

borrowing fees) between the price at which he sold the
shares he borrowed and the lower price at which he

was able to purchase the shares he returned.