Ok, you short sell one share (current mark price is $45):
- You 'borrow' the share, you sell it in the market place at the current price of $45 and receive $45 cash. You have to return the borrowed share in 7 days.
7 days go by.
- The share price has dropped to $1. You purchase one share in the open market and return it to who ever you borrowed it from
Your revenue: $45 - from the original sale
Your expense: ($1) - purchasing the share in the open market to return it to the borrower.
Your profit/(loss): $44
So, you can see the most profit you can make is $45, assuming the share price goes to $0.
Now let's assume the share price in fact rose to $1,000,000 instead of falling to $1.
Your revenue: $45 - from the original sale
Your expense: ($1,000,000) - purchasing the share in the open market to return it to the borrower.
Your profit/(loss): ($999,955)
As share prices can, in theory, rise to infinity you are exposed to infinite loss but can only profit to the amount of the share price at the time you shorted it.
I hope that helps
EDIT: I can't answer the question in your other thread (never saw that when I did FINS2624). To answer your above question, yes maximum profit is $4500 (100 * $45). I used 1 share in the above example for simplicity
