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I seem to have figured out a way to lose as little as possible while having the potential to cash in big:

Say there is this futures/stocks/commodity, let's call it LOOT.

I can borrow LOOT from an exchange and return them with interest after some time.

So this is what I do:

I buy 100 LOOT, and borrow 100 from the exchange. I agree to pay it back in 1 month.

I then immediately sell the 100 LOOT I borrowed.

Now, there are only 2 kinds of scenarios here, after a month:

A. LOOT's price skyrocketed. It went from 20 usd per share to 30. Never mind, I return the 100 LOOT I borrowed (which is in fact, my own loot), so my total loss is Transaction fee + interest, which seldom amounts to over 100 bucks.

B. LOOT's price plummeted. It went from 20 usd per share to 10. Then sweet! I'll simply buy 10 LOOT with the money I "borrowed" and return them with interest, and keep the money made of the price difference.

Assuming all the premises were true (that is, I can perform all the transactions I described), what would still make me lose a lot of money?

I believe this is a widely employed strategy? I'm quite new to investment.

Edit: D'oh! I can't believe I forgot to mention that I'm counting on the stocks to rise later time, the stocks I'm holding.

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    That sounds like going long and short at the same time. tradersexclusive.com/ad_trad_go_long_and_short – RonJohn May 24 '17 at 3:32
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    The best way to get rich quickly is to do so slowly. Invest in profitable, businesses that have long track record. That includes yourself, earn the best wages you can and attempt to increase revenue while keeping costs low. – Pete B. May 24 '17 at 12:00
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    Wise words @PeteB. – Matt Cox May 25 '17 at 4:20
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You didn't win in case B.

Borrowing shares and then selling them is known as "selling short". You received $2000 when you sold short 100 shares at $20. You spent $1000 to buy them back at $10, so you come out $1000 ahead on that deal. But at the same time, the 100 shares you already owned have declined in value from $20 to $10, so you are down $1000 on that deal. So you've simply broken even, and you are still out the interest and transaction fees.

In effect, a short sale allows you to sell shares you don't own. But if you do already own them, then the effect is the same as if you just sold your own shares. This makes it easier to see that this is just a complicated and expensive way of accomplishing nothing at all.

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The process of borrowing shares and selling them is called shorting a stock, or "going short." When you use money to buy shares, it is called "going long."

In general, your strategy of going long and short in the same stock in the same amounts does not gain you anything. Let's look at your two scenarios to see why.

When you start, LOOT is trading at $20 per share. You purchased 100 shares for $2000, and you borrowed and sold 100 shares for $2000. You are both long and short in the stock for $2000. At this point, you have invested $2000, and you got your $2000 back from the short proceeds. You own and owe 100 shares.

Under scenario A, the price goes up to $30 per share. Your long shares have gone up in value by $1000. However, you have lost $1000 on your short shares. Your short is called, and you return your 100 shares, and have to pay interest. Under this scenario, after it is all done, you have lost whatever the interest charges are.

Under scenario B, the prices goes down to $10 per share. Your long shares have lost $1000 in value. However, your short has gained $1000 in value, because you can buy the 100 shares for only $1000 and return them, and you are left with the $1000 out of the $2000 you got when you first sold the shorted shares. However, because your long shares have lost $1000, you still haven't gained anything. Here again, you have lost whatever the interest charges are.

As explained in the Traders Exclusive article that @RonJohn posted in the comments, there are investors that go long and short on the same stock at the same time. However, this might be done if the investor believes that the stock will go down in a short-term time frame, but up in the long-term time frame. The investor might buy and hold for the long term, but go short for a brief time while holding the long position.

However, that is not what you are suggesting. Your proposal makes no prediction on what the stock might do in different periods of time. You are only attempting to hedge your bets. And it doesn't work. A long position and a short position are opposites to each other, and no matter which way the stock moves, you'll lose the same amount with one position that you have gained in the other position. And you'll be out the interest charges from the borrowed shares every time.


With your comment, you have stated that your scenario is that you believe that the stock will go up long term, but you also believe that the stock is at a short-term peak and will drop in the near future. This, however, doesn't really change things much. Let's look again at your possible scenarios.

You believe that the stock is a long-term buy, but for some reason you are guessing that the stock will drop in the short-term. Under scenario A, you were incorrect about your short-term guess. And, although you might have been correct about the long-term prospects, you have missed this gain. You are out the interest charges, and if you still think the stock is headed up over the long term, you'll need to buy back in at a higher price.

Under scenario B, it turns out that you were correct about the short-term drop. You pocket some cash, but there is no guarantee that the stock will rise anytime soon. Your investment has lost value, and the gain that you made with your short is still tied up in stocks that are currently down.

Your strategy does prevent the possibility of the unlimited loss inherent in the short. However, it also prevents the possibility of the unlimited gain inherent in the long position. And this is a shame, since you fundamentally believe that the stock is undervalued and is headed up. You are sabotaging your long-term gains for a chance at a small short-term gain.

  • Your absolutely right, I forgot to say I'm planning on buying at a peak position and return the stocks after it dived and recovering. I wrote everything in a hasty manner, my bad. – Matt Cox May 24 '17 at 4:39
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    @MattCox you're planning on buying at what you think/hope/pray is a peak position. It's called "market timing", which is how to make a small fortune from a large fortune. – RonJohn May 24 '17 at 4:45
  • @ronjohn You are right, when something hiking up 33% within a week, I think it's safer to bet on it having been peaked than otherwise. – Matt Cox May 24 '17 at 5:36

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