There are no general rules regarding how long a short sale can last before being closed out. A short sale is a transaction in which shares of a company are borrowed by an investor and sold on the market. The investor is required to return these shares to the lender at some point in the future. The lender of the shares has the ability to request that the shares be returned at any time, with minimal notice. In this event, the short sale investor is required to return the shares to the lender regardless of whether it causes the investor a gain or a loss on his or her trade.

However, requests to return shares are rare, as the lender of the shares is a brokerage firm that has a large inventory of stock. The brokerage firm is providing a service to investors; if it were to call shares to be returned often, investors would be less likely to use that firm. Furthermore, brokerage firms benefit greatly from short sales through interest and commissions on the trades. And there is limited risk for the brokerage firms due to the restrictive margin rules on short sales.

Brokerage firms lend shares out of their inventory or out of their clients' margin accounts, or they borrow them from another brokerage firm. If a firm lends out shares from one of its clients' margin accounts and that client in turn wanted to sell his or her position, the brokerage firm will just have to replace the shares lent out from that client's account with other shares from one of the three main sources we listed. This would have no effect on the short seller.

There are some cases in which the lender will force the position to be closed. This is usually done when the position is moving in the opposite direction of the short and creating heavy losses, threatening the likelihood of the shares being returned. Either a request will be made to return the shares or the brokerage firm will complete the closing of the transaction for the investor. The terms of margin account contracts allow brokerage firms to do this.

While the power to force the return of the shares is in the hands of the lender, this power usually goes unused. Generally speaking, it will be the short seller, not the lender, who closes out the position. (For an in-depth look at short selling, see our Short Selling Tutorial.)

  1. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  2. How can an investor profit from a decline in the real estate sector?

    Speculation enables investors to profit from a decline in the real estate sector. The most popular forms of speculation for ... Read Full Answer >>
  3. How can I evaluate if a stock is a short squeeze?

    To evaluate whether a stock is a short squeeze, traders should examine its fundamentals, short interest and price history. ... Read Full Answer >>
  4. How does days to cover a short position relate to a short squeeze?

    Days to cover a short position reveals the intensity and duration of a potential short squeeze. A short squeeze occurs when ... Read Full Answer >>
  5. What is the difference between a short squeeze and short covering?

    "Short covering" and "short squeeze" are different terms to describe a situation involving short positions. A short squeeze ... Read Full Answer >>
  6. What is the difference between speculation and hedging?

    Speculators and hedgers are different terms that describe traders and investors. Speculation involves trying to make a profit ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  2. Investing News

    Defensive Investing: Learn from a Hedge Fund Pro

    Looking for ideas on companies, sectors or investments to short? Consider the opinion of this hedge fund luminary.
  3. Trading Strategies

    Finding Momentum Plays in Flat Markets

    Momentum traders should reduce frequency and size in flat markets, while seeking out story stocks that continue to trend higher or lower.
  4. Trading Strategies

    Why Short Sales Are Not For Sissies

    Short selling has a number of risks that make it highly unsuitable for the novice investor.
  5. Trading Strategies

    Know When To Hold, Know When To Fold A Short Sale

    Consider making a short sale in the following circumstances: Bearish trend is developing rapidly, fundamentals are deteriorating, technical indicators are signaling "Sell," and there is an abrupt ...
  6. Personal Finance

    Playing The Decline of Traditional Retailers

    Play the decline of traditional retailers with a strategy that lowers built-in exposure to online sales.
  7. Stock Analysis

    Where Do Chinese Equities Go from Here?

    Is it time to go long or short on Chinese equities?
  8. Investing Basics

    Hedging for Beginners: A Guide

    People hedge as insurance against market volatility. Anyone can do it; here's a primer.
  9. Stock Analysis

    The 3 Most Shorted Dow Stocks

    Read about three heavily shorted stocks that are components of the Dow Jones Industrial Average, including one company with recent success.
  10. Stock Analysis

    The 3 Most Shorted Nasdaq Stocks

    Learn about the three most shorted stocks on the technology-heavy NASDAQ exchange. Understand why investors are so bearish on these companies.
  1. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  2. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  3. Gross Exposure

    The absolute level of a fund's investments.
  4. David Einhorn

    Known for his short selling strategy, activist investor David ...
  5. Short Call

    A type of strategy regarding a call option, which is a contract ...
  6. Long-Short Ratio

    The amount of a security available for short sale compared to ...

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center