You borrow an asset from someone else, say 100 shares of Tesla. You sell what you just borrowed, say for $250 a share, and get a $25,000 cash loan. You're broker arranges all this, and you pay interest on the loan to your broker until you buy the stock back to return it.
If Tesla has a bad news day, and it's stock goes down to $200, you buy it back for $20,000 and return it to the former owner. Again, your broker arranges it all. From the $5000 difference, you pay your broker his interest and pocket the rest, it's yours to keep.
But, if Tesla has a great news day, and its stock goes up to $300, you now are liable for $30,000 to re-aquire the asset you borrowed and sold (100 shares of Tesla stock). If your broker only grants you a $31,000 line of credit, he closes your loan: He uses your account to buy the now high price stock and also collects the interest owed to him.
You're out $30,000 to buy back the stock and another $1,000 or so in interest for the privilege to gamble in your broker's casino, a net loss of $6,000.
Thanks.
Makes sense except terminology, for example: “ You sell what you just borrowed, say for $250 a share, and get a $25,000 cash loan.”
If you sold it why is it a loan? Why isn’t it just that you get $25,000 on the sale?