A:

There is no mandated limit to how long a short position may be held. Short selling involves having a broker who is willing to loan stock with the understanding that they are going to be sold on the open market and replaced at a later date. A short position may be maintained as long as the investor is able to honor the margin requirements and pay the required interest and the broker lending the shares allows them to be borrowed.

Investors short stocks anticipating that the market price will fall, allowing them to buy shares to replace them at a lower price. Stocks are shorted by many investors every day. Some specialize either largely or exclusively in short selling.

A stock that doesn't decrease in value quickly enough ends up costing the investor interest. The proceeds of the initial sale go into the investor's account and he or she pays the broker a percentage, which is usually around the U.S. prime rate plus 2%. At any point in time, the investor may buy replacement shares on the open market and return them to the brokerage. If he or she is able to buy them at a lower price, the investor keeps the difference as a profit. If the price is higher, the investor suffers a loss.

For skilled investors, the terms offered by brokers for short selling can be quite favorable. Making stock available to be shorted at an interest rate just a few percentage points above prime appears to be a very good deal. The price of the shares can be much lower at the time of purchase, and the broker will have only received a small percentage of their original value. This suggests that brokers regularly suffer significant losses in the share-lending business. Nevertheless, share lending is very profitable for brokerages.

Investors may find that the best candidates for short selling are unavailable to be shorted. The availability of stocks for shorting changes regularly. Many stocks offered by smaller companies may not be available for shorting at all.

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