Potentially Unlimited Loss
The maximum loss of an investor who has bought a stock is their initial outlay if that stock moves to zero. On the contrary, a short seller can lose more than their initial investment. Given that there is no ceiling theoretically as to how much the price of a stock may rise, this means that the loss could be unlimited when it comes to closing a position.
Margin Call
All clients are responsible for maintaining the required maintenance amount at all times to avoid a margin call and/or forced liquidation.
Stock Borrowing Costs
All clients must account for the interest charged on the borrowed stocks until they are returned. The daily short interest rate can fluctuate substantially as a result of high short interest, limited float or any other reasons which could not be pre-determined. Webull currently does not charge any stock borrowing fee.
Recall and Liquidation
Borrowed stocks can be recalled by the stock lender at any time. In the event of a recall, the broker would attempt to re-borrow the stock. However, if the borrowing attempt fails, the broker will close the short position at the current market price and this could lead to an unexpected loss to the customer
Short Squeeze
A short squeeze happens when a stock rises sharply suddenly and the short seller scrambles to purchase shares to cover the positions. A demand surge for the share can drive the price higher and causing even more short sellers to exit their positions by buying back the shares.
Corporate Action
The short seller is responsible for the dividend distribution and other events associated with the shorted stock, such as share splits, bonus shares issues etc, to the stock lender. Certain corporate actions may also cause the increase in short interest rate. All this will attribute to higher short selling cost.
Delisting and Suspension
When a stock is suspended or undergoing a delisting process, the securities lending fee will still be charged on the short position until the stock is covered back when the stock resumes trading or becomes delisted. This process can continue for a long period of time and the securities lending fee, which is computed based on the last traded price or delisting price, may be costly.
