How long can you short sell for?

By Jean Folger AAA
A:

When an investor or trader enters a short position, he or she does so with the intention of profiting from falling prices. This is the opposite of a traditional long position where an investor hopes to profit from a rising market.

A brokerage firm lends shares or contracts to the customer who engages in the short sale. The firm uses its own inventory, another customer's margin account or another lender to supply the shares or contracts to the shorting customer. The customer typically pays interest on the loan, and if a borrowed stock pays a dividend, the customer is also responsible for paying the original owner the value of the dividends.

In theory, you could keep a short position open indefinitely to take advantage of a falling market. Technically, you could be required to "buy to cover" this position if the lender demanded the shares or contracts back; however, this would be uncommon.

You must have a margin account to short stocks, and you could also be forced to close the position if you receive a margin call. Your broker will issue a margin call if the value of your account falls below a certain threshold, and the broker can liquidate any position in your portfolio without consulting you. The broker has the right to decide which positions to close, including any short positions.

RELATED FAQS

  1. What investors come close to challenging Warren Buffett as the greatest investor ...

    Discover two legendary investors who not only challenge but perhaps exceed Warren Buffett in terms of their talent and achievements ...
  2. If I use hedging as a risk strategy, do I have to keep my eye on my portfolio all ...

    Understand the concept of hedging and learn how this key element to portfolio management can help an investor protect profits ...
  3. What are common trading strategies used in a bull market?

    Discover four commonly used trading strategies by investors and analysts to make profits from a prolonged bull market, including ...
  4. Do you have to be an expert investor to trade put options?

    Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined ...
RELATED TERMS
  1. David Einhorn

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

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

    The amount of a security available for short sale compared to ...
  4. Stock Loan Rebate

    Interest paid by a stock lender to a borrower who has put up ...
  5. Stock Loan Fee

    A fee charged by a brokerage firm to a client for borrowing shares. ...
  6. Short-Interest Theory

    A theory which holds that a security with a high degree of short ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    Are These the Top Inverse ETFs of 2 ...

  2. Mutual Funds & ETFs

    Will the Natural Gas ETF KOLD Stay Hot?

  3. Options & Futures

    How To Protect A Short Position With ...

  4. Mutual Funds & ETFs

    A Guide to Using Inverse ETFs for Diversification

  5. Trading Strategies

    Book Reliable Profits With Pullback ...

Trading Center