> If you have an actual short position, your potential losses are unlimited.
Isn’t this a bit like saying that the potential upside of holding any stock is unlimited?
Isn’t this a bit like saying that the potential upside of holding any stock is unlimited?
To use a slightly anomalous stock which hasn't split as an easy example, if you had shorted $BRK in 1980 when the price was $300, the potential upside was just 100%: In your best outcome, they go bankrupt and the most you earn is $300. Unfortunately for you, Berkshire Hathaway shares are now worth $430,000, so your $300 or 100% upside turned out to be a rounding error against the approximately -150000% loss.
Edit: The reverse is technically symmetrical, but the consequences make it work out differently for the markets and society. Yes, if you'd bought BRK in 1980 you'd have had a liability of $300 (your cash input could be worthless if they went bankrupt) and a potential upside of hundreds of thousands if it went to the moon.
The difference is that if you held the stock and it goes bankrupt, you're only liable for the amount that you put in. Worst case, you bet the farm and you're going to be washing dishes to put food on the table, but it's your loss to lose and your gain to win. If instead you bet the farm in a short position, you never had and will never have thousands of farms to bet in the first place; you're going to declare bankruptcy and someone else is going to have to pay for the bad bet you made. That effectively pushes the losses back on society but privatizes the gains.
However, if you lose $300 that you brought to the table, that's your problem, too bad for you. If you lose $430,000 when you only brought $300 to the table, that's beyond being just your problem, that's the system's problem.
A system which allows this situation to happen is fundamentally flawed, it's vulnerable to exploitation and collapse if this kind of behavior allowed to go on unchecked.
Those guys in finance and regulations have been here before we were born, they managed to cover most basic stuff by now.
If you have a stock you have to sell and there are no offers to buy on the books you can't offer to sell then keep raising the price, instead you would need to keep lowering the price. The price is either limited by what's on the books, or you need to wait an indeterminate amount of time for some one to buy at the price you are selling. During this time you are trying to sell your profit is decreasing (as you lower the price to get a buyer) and bounded by $0 (for a limited liability company).
So while it's true that if you hold a stock indefinitely the value you could get is unlimited with a short the value you could lose could be unlimited over a much shorter time frame.
[1] Whether you actually need to cover your shorts may be a matter of some debate if you look at the wild rumors around GME
This means with the cash it takes to buy 1 share you can short as many shares as someone will lend which can multiply your loss to more than you have.