A:

An investor should hold a short sell position for as long as the investment is profitable and as long as the investor can reasonably expect the profits to increase. However, there are a number of additional factors that can influence a short seller's decision on when to close out his investment.

One factor to consider is interest charges from the broker on the loan of the shares to the investor's margin account. The longer the investor holds on to the short, the more interest charges accumulate. This becomes problematic if the amount of interest paid on the borrowed shares eliminates any profit realized from the short sale. The aim is to hold onto the short until the price of the stock drops, enabling the investor to buy back the borrowed amount of shares at a lower price and realize a profit from the short sell transaction, but interest charges must be figured into net profit.

A major factor in determining how long an investor maintains a short position is how large a loss he or she is willing to sustain in the event the stock price rises rather than declines. Maximum acceptable loss should be decided before initiating any investment. Short sellers must have an awareness of the increased risk level involved in selling short as opposed to buying long.

An investor buying a stock can only sustain a maximum loss of 100% of his or her investment, but a short seller, while having a maximum potential profit of 100%, faces virtually unlimited risk given that a stock price can theoretically rise to infinitely higher prices.

If the short position is being used to hedge an existing long position, then the investor may wish to hold on to the short for as long as he or she maintains the opposing long position, or at least until he or she no longer considers the long position to be in danger of significant decline.

RELATED FAQS
  1. How long can a trader keep a short position?

    Learn whether there are any limitations on how long may an investor hold a short position, and explore the costs associated ... Read Answer >>
  2. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  3. What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being ... Read Answer >>
  4. What Part of a Company's Float Can Be Shorted?

    The quick answer: The number of shares shorted can actually exceed 50% of the float in a company. Read Answer >>
Related Articles
  1. Investing

    The Basics Of Short Selling

    Short sellers enable the markets to function smoothly by providing liquidity, and also serve as a restraining influence on investors’ over-exuberance.
  2. Trading

    Short Interest: What It Tells Us

    Whether you agree with the overall sentiment or not, short interest is a data point worth adding to you overall analysis of a stock.
  3. Difference Between Short Selling And Put Options

    Short selling and put options are used to speculate on a potential decline in a security or index or hedge downside risk in a portfolio or stock.
  4. Financial Advisor

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
  5. Trading

    The Difference Between a Long and Short Position

    Stocks are owned in a long position and owed in a short position.
  6. Managing Wealth

    Value Investing & Short Selling Are Like Oil & Water

    To be a good value investor, you need to find and buy bargain stocks but more importantly, you have to stick to the trade until the market recognizes the worth of these securities.
  7. Investing

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  8. Investing

    Rules and Strategies For Profitable Short Selling

    Short sales work well in bull and bear markets but strict entry and risk management rules are required to overcome the threat of short squeezes.
RELATED TERMS
  1. Short Sale

    A short sale involves borrowing shares in anticipation of a price ...
  2. Net Short

    Net short is a portfolio or trading position leveraged to an ...
  3. Short Selling

    Short selling is the sale of a security that is not owned by ...
  4. Net Long

    Net long refers to a condition in which an investor has more ...
  5. Buy To Close

    Buying to close involves purchasing an offsetting position to ...
  6. Short Interest Ratio

    A sentiment indicator that is derived by dividing the short interest ...
Hot Definitions
  1. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  5. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center