Question

Last year you sold short 400 shares of stock selling at ​$90.00 per share. Six months later the stock had fallen to ​$45.00 per share. Over the​ six-month period, the company paid out two dividends of ​$1.50 per share. Your total commission cost for selling and buying the shares came to ​$125. Determine your profit or loss from these transactions.

Answer 1

The net profit from these transactions is $ $ 16.675

Explanation:

1. Let's recall that short selling involves the sale of stock that the seller does not own, or shares that the seller has taken on loan from a broker, therefore we sold:

400 * 90 = $ 36,000

2. Then we bought these shares at $ 45 each one, six months later:

400 * 45 = $ 18,000

3. The gross profit is:

36,000 - 18,000 = $ 18,000

4. Dividends paid out:

400 * 1.50 * 2 = $ 1,200

5. Commission cost:

$ 125

6. Net profit:

18,000 - 1,200 - 125 = $ 16.675

Answer 2

The selling of the stocks gave a profit of $16,675.

Explanation:

The initial capital was 400 shares, that were valuated at $90.00. This is $36,000.

Six months after, the price drop to $45.00 per share. The stocks that you sold would be valuated a total of $18,000.

That is a relative profit of $18,000.

Then, we have to substract the dividends that you didn't get and the cost of transaction.

The dividends are two payments of $1.50 per share each. The total amount is 400*1.50*2=$ 1,200.

The cost of transaction is $125.

Then, the net profit from selling is:

P = $18,000 - $1,200 -$125= $16,675