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Bonnie Bell | If you short sell and lose , how do you afford to buy stock back to return? Do you just use your own funds? |
to buy the stock to return to the broker?
Additional Details
Assuming you have funds |
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walt17jr
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Your broker will not allow you to lose so much that you can't buy the stock back. When you short sell, you are trading on margin. (borrowed funds)
You are only allowed to borrow a percentage of your assets. (cash and stock) Your broker maintains a running total of your account balances. When you exceed your margin limit, you will get a margin call. You must deposit more funds or sell stock. Or cover the short sell. If you don't he will sell some of your stocks for you.
Bottom line: Your broker is going to protect his interests. By forcing you to close positions before you reach the point where you can't buy it back. You might get killed. But your broker won't take a loss. |
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A nobody
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When you sell short, you must keep equity in your account
this is why many firm will require you to maintain a margin account when you sell short.
When you sell short there is a credit in your account from the sale of the stock along with other equity that you have in either your margin and/or cash account.
When you are short, the account is "marked to the market" which means if the price of the stock goes up, you are required to deposit monies in the account or money is taken from your margin account,
When you sell short, your brokerage firm borrows the stock, not you. And when the firm borrows the stock they give the money equal to the market value of the stock they are borrowing. So the lender is covered since they were paid in full for the stock the lent out.
When you have a short & a margin account you are required, by law to carry at least 25% equity or $2,000 so your account will never fall below zero
When you buy the stock back, the purchase amount is used to off-set the credit you received when you sold the stock short. If there is money left over, it's yours, if not, they charge your margin or cash account and since you were required to have equity in the account you should not be required to put out more money,
At the same time when you buy back the stock, the stock is then delivered to the lender who will return the money they received when they lent the stock |
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km1in
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If you want to short sell in cash market, the stock broking co will ensure that you have the sufficient cash/stock margin to cover it back (buy back). In case if you lose in a short sell trade, the amount will be debited to your account immediately. That means your available funds for the next trade would be reduced to this extent. If you do not have sufficient cash/stocks in ur account to cover the losses, then they will ask you to bring in the cash immediately |
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Stu G
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Yes, but when you short a stock you must have assets or cash in the account. The brokerage firm only lets you borrow so much, margin, and if the percentages change to much you get a margin call, which means you either have to send in more money or stock with a value to it, or they sell what you do have in the account to cover your margin call.
Brokerage firms do not trust that you will have the money to cover the short, they make sure you have the funds in the account already. If they sell the stock you have and it doesn't cover when you owe, and you don't have money to pay what you owe then they have to eat it, that is take a loss themeselves. They won't be around long if they did that. |
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raysor
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Aye. |
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robe
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Correct.
Your potential loss on a "normal" buy low, sell high purchase is limited to the cost of your stock.
Your potential for loss on a short sale, or a sell high, buy low purchase, is in theory, infinite. This is why you always want to set a stop limit goal at which to buy the stock back, to limit your losses, and to stop out (cover) at a set profit and take your gains. |
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jonathan_insall
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I've never done this personally (check with your broker first), but if you purchased a put option contract at a strike price at or below the current market price for that security, it can afford you the risk. |
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Rej
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Yes you have to use your own funds. Many accounts have auto close if the losses exceed a certain percentage or if the margins are insufficient to pay for the losses. |
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