A stock split can drastically change the price of a stock and the size of your position. When you are short a stock, the occurrence of a stock split can add even more confusion. By understanding how shorting works and what occurs during different types of stock splits, you can be prepared for the sometimes startling changes that can occur to your short position on the day of the split.
Shorting
Shorting occurs when a stock is sold before it is purchased. When you do this, you're making a bet that the stock price will drop, and you will profit if it does so. For example, if you short 100 shares of a stock at $10, your account will be credited with $1,000, but you will be negative 100 shares. At some point you must buy 100 shares to offset your negative share situation because your broker has essentially borrowed you someone else's shares. If you can buy the 100 shares back at $9, costing you $900, you reap a $100 profit. If the stock moves higher, however, you face potentially infinite losses since there is no cap on how high the price can go. If you are short, you also must pay any dividends the company issues.
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