# If I short \$ 5,000 worth of stocks and the stocks lose value, wouldn’t the return be much greater than 100%?

By Mark Holland / last month The maximum return on any short sale investment is 100%. While this is a simple and straightforward investment principle, the underlying mechanics of short selling, including lending stocks, assessing liability for the sale, and calculating returns, can be thorny and complicated. This article will clarify these issues.

To calculate the return on any short sale, simply determine the difference between the income from the sale and the cost associated with selling that particular position. This value is then divided by the initial proceeds from the sale of the loaned shares.

Consider the following hypothetical trade. Suppose an investor sells 100 shares at \$ 50 per share. In this scenario, the total proceeds from the sale would be \$ 5,000 (\$ 50×100). This amount would be deposited into the associated brokerage account. If the shares fell to \$ 30 and the investor closed the position, it would cost them \$ 3,000 (\$ 30×100), thus leaving \$ 2,000 in the account (\$ 5,000 – \$ 3,000). Consequently, the yield would be equal to 40%, which is calculated by dividing the \$ 2,000 remaining in the account by the initial proceeds from the sale of the loaned shares (\$ 5,000).

If the borrowed shares fell to \$ 0 in value, the investor would not have to repay anything to the title lender and the return would be 100%. Some find this calculation confusing, due to the fact that no pocket money is spent on the shares at the start of the trade. Many investors mistakenly believe that if they can make \$ 5,000 without spending a dollar of their own money, the return is well above 100%. This assumption is false.

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The following table clarifies how the different returns are calculated based on the change in share price and the amount owed to cover the liability.

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