F303 Intermediate

Investments

Jun Wu
Kelley School of Business
Indiana University
Lecture 2

F303

MARGIN
Investors have access to a source of debt
financing, called brokers call loans
When an investor borrows part of the purchase
price from the broker, we say she is buying on
margin
The margin is the portion of the purchase price
contributed by the investor
F303

Short Selling
Is it possible for an investor to sell shares they do not own?

1. No, it is illegal.
2. You have to borrow the shares
and then you can sell it.
3. You can sell without
borrowing in your brokerage
account.

F303

Short Sales
It is possible for an investor to sell shares they do not own!
Q: How?
A: ___________________________________________________
Q: Why do we call it short selling when the investor sells borrowed
shares?
A: ___________________________________________________
Q: When/why would you want to short sell a stock?
A: ___________________________________________________

F303

Short Sales
Investor short sell when they are bearish about
the stocks outlook (or for hedging reasons which
well discuss later)
How do you close out your position?

F303

Selling vs. short selling

Initial
position

sell

result

Sell a stock 100 shares

You own

-100 shares 0 shares

Sell a stock 0 shares

you dont
own

-100 shares -100 shares

That is, when you sell a stock, you close out

your position. When you short-sell a stock, you
initiate a new (negative/short) position
F303

Buying vs. short selling

To initiate a new position
You can buy a stock (positive exposure)
benefit when the stock performs well after the
purchase
You can short-sell a stock (negative exposure)
benefit when the stock performs poorly after
the purchase
WHICH POSITION IS RISKIER? WHY?
F303