Explanation:
When short selling a stock, the investor profits from a decline in the stock's price but is responsible for paying any dividends declared during the period they are short the stock.
Gross profit from short sale = (Selling Price - Buying Price) × Number of Shares
Gross Profit = ($50 - $45) × 1,000 = $5 × 1,000 = $5,000.
Dividend payment owed to the stock lender = Dividend per share × Number of Shares
Dividend Owed = $1.5 × 1,000 = $1,500.
Net Profit = Gross Profit - Dividend Owed
Net Profit = $5,000 - $1,500 = $3,500.
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Q.19 An investor short sells 1,000 shares of XYZ Corporation in June when the price is USD50 per share. In September, a dividend of USD1.5 per share is paid by the company. The investor closes out the position in October when the price of the share is USD45. Assuming there are no borrowing costs involved, what is the profit or loss for the investor?
A
$3,500
B
$6,500
C
$5,000
D
$1,500
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