Question

Last week, Seward Company stock was selling at $66 a share when Ryan sold 300 shares of the stock short. Today Ryan bought 300 shares of the same stock at a price of $70.00 share to cover his position. Ignoring trading costs, what is the dollar return on Ryan's investment?

Answer 1

Answer:

The answer is: Ryan lost $1,200 dollars

Explanation:

Ryan sold short 300 shares of the stock when it was at $66. This means, he borrowed 300 shares from the broker with the obligation of buying them back later. When you sell short, you want the stock price to go down to make money, because when you buy them back you are buying at a lower price than what you sold them for, and the price difference times the number of shares is your gain.

In this case, the price went up to $70 and he decided to buy them back before the stock went higher up and he lost more money. Since he sold short at $66 and bought back at $70, it means he lost $70-$66=$4 per share. Multiply this by the amount of shares in the transaction $4x300=$1200. And that is the dollar return on his investment which is negative in this case.