- Tax Planning
- Investments 1: Before you Invest
- Investments 2: Your Investment Plan
- Investments 3: Securities Market Basics
- Investments 4: Bond Basics
- Investments 5: Stock Basics
- Investments 6: Mutual Fund Basics
- Investments 7: Building Your Portfolio
- Investments 8: Picking Financial Assets
- Investments 9: Portfolio Rebalancing and Reporting
- Retirement 1: Basics
- Retirement 2: Social Security
- Retirement 3: Employer Qualified Plans
- Retirement 4: Individual and Small Business Plans
- Estate Planning Basics
Case Study #1 Answers
Profits are made on short selling as the market price of a stock goes down. In this example, the stock fell to $45 per share. To determine Anne’s profit or loss, use the following calculation:
| Total value of the shares at $90 * 400 | $36,000 credit |
| Purchase cost of the shares ($45 * 400) | –$18,000 purchase |
This is the purchase cost to cover your borrowing of the shares
| Gross Profit | $18,000 |
| Dividends (2 x $1.50 x 400) | $1,200 |
Since Anne sold these shares, she must pay back the dividend that the owners would have received.
| This is your commission cost | –$125 commissions |
| Net profit | $16,675 |
This is Anne’s profit if the stock price declined from $90 to $45.
b. Profits are made on short selling as the market price goes down. In this example, the stock’s price went up to $250 per share. To determine Anne’s loss, use the following equation:
| This is the sale of the shares at $90 (x 400) | $36,000 credit |
| Purchase cost to cover borrowing ($250) | –$100,000 purchase |
| Net Profit | –$64,000 loss |
| Dividends (2 x $1.50 x 400) | –$1,200 dividends |
Since Anne sold these shares, she must pay back the dividend.
| Commissions –$125 commissions | |
| Net Profit | –$65,325 net profit |
This is Anne’s loss if the stock price increased from $90 to $250.
