|Constructing a leverage short product
In the case of a short product, the investor has a leveraged short position in the share, again with a stop-loss. To create or hedge this position the issuing bank will borrow shares on a short-term basis from institutions such as pension funds or fund managers. This short-term borrowing is rolled over until the position needs to be unwound. The bank then sells these borrowed shares in the market. The receipt from that sale will be placed in an income-paying deposit until the position is unwound, with this interest income partly covering the borrowing cost for the borrowed shares.
If the price of the shares falls and the investor wants to unwind his or her position, the bank will then buy back these shares from the market at a lower price than it sold them for originally and return the shares back to the original lender. This results in a profit for the investor.
If the price of the shares rises and either the investor wants to unwind his position or the stop-loss feature is triggered, the bank will again buy back these shares from the market but now at a higher price than it sold them for originally, and return the shares to the original lender. This results in a loss for the investor.