When a Stock Is Shorted, Is There Any Limit to How Long Before Covering?
Selling stock short is the process of borrowing stock from your broker and then selling it on the open market with the obligation of buying it back at some later point. If you are able to buy back the shares at a lower price than you were paid for them, you keep the difference as your profit. There are no legal restrictions on how long you can hold a stock you sold short, but your broker may limit you under certain conditions.
Other People Are Reading
-
Short-Selling and Available Shares
-
In order to sell a stock short, your broker must have shares of that stock in her inventory. This means that the broker must actually own shares or her clients must own shares that she are holding. If shares become unavailable, your broker can force you to close your short sale by buying back shares at the current market price.
Margin Calls
-
When you sell stock short, you can potentially lose an unlimited amount of money because there is no limit to how high a stock price can rise. When you sell a stock short, you are required to buy it back at some point. If the price rises, you may have to buy it back at a higher price than you sold it, losing money in the process. If the price rises too much, putting your broker at risk, your broker will issue a margin call forcing you to buy back your shares at a loss.
-
Short-Sale Restrictions
-
The practice of selling stocks short is a widely used and accepted practice in the financial markets, so there are very few restrictions. The one exception to this rule occurs when trading curbs kick in. If a stock price falls 10 percent in a single day, it will trigger a trading curb with the exchange it trades on. In this instance, you will only be able to sell shares short when the last quoted price is higher than the previous quoted price. Trading curbs do not limit how little or how much time you can hold your shares short once you have made the sale.
Short-Sale Alternatives
-
If you are concerned that your broker can force you to close a short sale due to the unavailability of shares or a margin call, there are viable alternatives to selling short. An inverse exchange-traded fund (ETF) is similar to a mutual fund that has its performance tied to an index, such as the S&P 500. As its name implies, an inverse ETF trades inverse the index it is tied to. For example, SDS is an inverse ETF that rises when the S&P 500 declines. As long as you do not borrow money to buy an inverse ETF, you can hold it as long as you like.
-
References
- Photo Credit Comstock/Comstock/Getty Images
