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What happens if a short can't be covered?
How come I can't sell short certain stocks? My broker says “no shares are available”Why can't I short a particular stock?What do brokers do with bad stock?What happens when short interest exceeds outstanding sharesGoing long vs short, mechanisms involvedWhy does short selling require borrowing?Shorting: What if you can't find lenders?What is a Rebate rate when short selling sharesWhat happens to a short seller, who wants to close his position, but there are no shares available for sale?Short-Ratio, Short-Squeeze and Bullish Market
.everyoneloves__top-leaderboard:empty,.everyoneloves__mid-leaderboard:empty,.everyoneloves__bot-mid-leaderboard:empty margin-bottom:0;
My understanding is that when you short a stock you borrow it from a broker and the broker in turn usually borrows it from one of their other customers.
Now lets say the stock suddenly rockets in value, to the point that the customer can't cover the short? What happens? does the broker take the hit?
If the broker is the one who normally takes the hit what if the broker can't cover it either? does the person whose stock was borrowed take the hit?
shorting-securities
asked 8 hours ago
Peter GreenPeter Green
2,3666 silver badges12 bronze badges
add a comment |
My understanding is that when you short a stock you borrow it from a broker and the broker in turn usually borrows it from one of their other customers.
Now lets say the stock suddenly rockets in value, to the point that the customer can't cover the short? What happens? does the broker take the hit?
If the broker is the one who normally takes the hit what if the broker can't cover it either? does the person whose stock was borrowed take the hit?
shorting-securities
asked 8 hours ago
Peter GreenPeter Green
2,3666 silver badges12 bronze badges
1
"If the broker is the one who normally takes the hit what if the broker can't cover it either?" If your short losses were big enough to bankrupt your broker, now that would be quite an event.
– JB Chouinard
6 hours ago
Such blunder only happens in third world country that doesn't control the short during Asia economic crisis. Now every countries broker set a threshold for shorting.
– mootmoot
6 hours ago
Broker borrows shares from in house account. If shares not available in house then he borrows them from another broker with lendable shares. You need to distinguish covering the short from having the margin to cover the short. If stock is trading, it is buyable and the short is coverable. If the trader's account lacks the margin to pay for covering it then the broker closes out existing positions in the account to cover the deficit (long and short). If that is insufficient to cover the cost of the purchase then the broker chases the trader legally for any outlay made by the broker.
– Bob Baerker
5 hours ago
add a comment |
My understanding is that when you short a stock you borrow it from a broker and the broker in turn usually borrows it from one of their other customers.
Now lets say the stock suddenly rockets in value, to the point that the customer can't cover the short? What happens? does the broker take the hit?
If the broker is the one who normally takes the hit what if the broker can't cover it either? does the person whose stock was borrowed take the hit?
shorting-securities
asked 8 hours ago
Peter GreenPeter Green
2,3666 silver badges12 bronze badges
My understanding is that when you short a stock you borrow it from a broker and the broker in turn usually borrows it from one of their other customers.
Now lets say the stock suddenly rockets in value, to the point that the customer can't cover the short? What happens? does the broker take the hit?
If the broker is the one who normally takes the hit what if the broker can't cover it either? does the person whose stock was borrowed take the hit?
shorting-securities
shorting-securities
asked 8 hours ago
Peter GreenPeter Green
2,3666 silver badges12 bronze badges
asked 8 hours ago
Peter GreenPeter Green
2,3666 silver badges12 bronze badges
edited 8 hours ago
Peter Green
asked 8 hours ago
Peter GreenPeter Green
2,3666 silver badges12 bronze badges
asked 8 hours ago
Peter GreenPeter Green
2,3666 silver badges12 bronze badges
asked 8 hours ago
Peter GreenPeter Green
2,3666 silver badges12 bronze badges
2,3666 silver badges12 bronze badges
1
"If the broker is the one who normally takes the hit what if the broker can't cover it either?" If your short losses were big enough to bankrupt your broker, now that would be quite an event.
– JB Chouinard
6 hours ago
Such blunder only happens in third world country that doesn't control the short during Asia economic crisis. Now every countries broker set a threshold for shorting.
– mootmoot
6 hours ago
Broker borrows shares from in house account. If shares not available in house then he borrows them from another broker with lendable shares. You need to distinguish covering the short from having the margin to cover the short. If stock is trading, it is buyable and the short is coverable. If the trader's account lacks the margin to pay for covering it then the broker closes out existing positions in the account to cover the deficit (long and short). If that is insufficient to cover the cost of the purchase then the broker chases the trader legally for any outlay made by the broker.
– Bob Baerker
5 hours ago
add a comment |
1
"If the broker is the one who normally takes the hit what if the broker can't cover it either?" If your short losses were big enough to bankrupt your broker, now that would be quite an event.
– JB Chouinard
6 hours ago
Such blunder only happens in third world country that doesn't control the short during Asia economic crisis. Now every countries broker set a threshold for shorting.
– mootmoot
6 hours ago
Broker borrows shares from in house account. If shares not available in house then he borrows them from another broker with lendable shares. You need to distinguish covering the short from having the margin to cover the short. If stock is trading, it is buyable and the short is coverable. If the trader's account lacks the margin to pay for covering it then the broker closes out existing positions in the account to cover the deficit (long and short). If that is insufficient to cover the cost of the purchase then the broker chases the trader legally for any outlay made by the broker.
– Bob Baerker
5 hours ago
1
1
"If the broker is the one who normally takes the hit what if the broker can't cover it either?" If your short losses were big enough to bankrupt your broker, now that would be quite an event.
– JB Chouinard
6 hours ago
"If the broker is the one who normally takes the hit what if the broker can't cover it either?" If your short losses were big enough to bankrupt your broker, now that would be quite an event.
– JB Chouinard
6 hours ago
Such blunder only happens in third world country that doesn't control the short during Asia economic crisis. Now every countries broker set a threshold for shorting.
– mootmoot
6 hours ago
Such blunder only happens in third world country that doesn't control the short during Asia economic crisis. Now every countries broker set a threshold for shorting.
– mootmoot
6 hours ago
Broker borrows shares from in house account. If shares not available in house then he borrows them from another broker with lendable shares. You need to distinguish covering the short from having the margin to cover the short. If stock is trading, it is buyable and the short is coverable. If the trader's account lacks the margin to pay for covering it then the broker closes out existing positions in the account to cover the deficit (long and short). If that is insufficient to cover the cost of the purchase then the broker chases the trader legally for any outlay made by the broker.
– Bob Baerker
5 hours ago
Broker borrows shares from in house account. If shares not available in house then he borrows them from another broker with lendable shares. You need to distinguish covering the short from having the margin to cover the short. If stock is trading, it is buyable and the short is coverable. If the trader's account lacks the margin to pay for covering it then the broker closes out existing positions in the account to cover the deficit (long and short). If that is insufficient to cover the cost of the purchase then the broker chases the trader legally for any outlay made by the broker.
– Bob Baerker
5 hours ago
add a comment |
2 Answers
2
active
oldest
votes
Buying and shorting on margin requires 50% margin.
If you short 100 shares at $100 the you have:
$10,000 Market Value
$ 5,000 Equity
$15,000 Credit
Margin is Equity/Market Value = 50%
The Minimum Margin Maintenance Requirement for NASDAQ and NYSE stocks is 25% though brokers can require more (leveraged ETFs require more margin). The MMMR is Credit/1.25 = $12,000. At $120 per share, you'll have 25% margin ($3,000/$12,000):
$12,000 Market Value
$ 3,000 Equity
$15,000 Credit
In the old days, if you modestly breached the MMMR, brokers would give you a warning and up to 3 days to meet the margin call. These days, the computers at online brokers monitor the margin level closely and they tend to close violations out, often with poor fills. Some might give you the opportunity to transfer other in house assets into your margin account to meet the margin call.
If your position sky rockets and blows through the remaining 25% of margin with no opportunity to close (for example, a buy out offer), your position will be closed ASAP by the broker. The lender of the shares does not take the hit. The broker does and will chase you legally.
answered 7 hours ago
Bob BaerkerBob Baerker
23.6k2 gold badges36 silver badges62 bronze badges
add a comment |
This is why the broker will require you to keep some 'margin' in your account. Ie: you need a positive investment position for the broker to loan you any funds.
So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left. Your broker will have specified in their agreement with you, that you have $x or y% margin remaining at all times, or else they will simply liquidate your account.
So with only $2k left in margin, perhaps the broker will decide that there is too much risk for them, and they will sell your $10k of investments on your behalf, covering off their own $8k losses incurred by your short, and giving you $2k in cash as the remaining balance.
The other option may be for the broker to give you a warning that you need to deposit further funds in your account, to avoid it being liquidated like this.
answered 8 hours ago
Grade 'Eh' BaconGrade 'Eh' Bacon
21.5k9 gold badges56 silver badges77 bronze badges
Sure, the broker will take steps to make uncoverable shorts less likely, what I am asking is what happens if despite those precuations a short cannot be covered.
– Peter Green
8 hours ago
1
Your answer discusses what precautions there are to make sure the short is covered, but it doesn't explain what happens if it can't, which is what the question asks.
– Acccumulation
8 hours ago
"So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left." It doesn't work that way (subtracting the loss from the initial margin equity). As share price increases (the short position is losing), the market value of the position increases by X. At the same time, equity is reduced by the appreciation in the short position (initial equity minus X). A $20k short supported by $10k in cash or marginable securities would have $4k of upside at 25% margin.
– Bob Baerker
7 hours ago
add a comment |
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2 Answers
2
active
oldest
votes
2 Answers
2
active
oldest
votes
active
oldest
votes
active
oldest
votes
Buying and shorting on margin requires 50% margin.
If you short 100 shares at $100 the you have:
$10,000 Market Value
$ 5,000 Equity
$15,000 Credit
Margin is Equity/Market Value = 50%
The Minimum Margin Maintenance Requirement for NASDAQ and NYSE stocks is 25% though brokers can require more (leveraged ETFs require more margin). The MMMR is Credit/1.25 = $12,000. At $120 per share, you'll have 25% margin ($3,000/$12,000):
$12,000 Market Value
$ 3,000 Equity
$15,000 Credit
In the old days, if you modestly breached the MMMR, brokers would give you a warning and up to 3 days to meet the margin call. These days, the computers at online brokers monitor the margin level closely and they tend to close violations out, often with poor fills. Some might give you the opportunity to transfer other in house assets into your margin account to meet the margin call.
If your position sky rockets and blows through the remaining 25% of margin with no opportunity to close (for example, a buy out offer), your position will be closed ASAP by the broker. The lender of the shares does not take the hit. The broker does and will chase you legally.
answered 7 hours ago
Bob BaerkerBob Baerker
23.6k2 gold badges36 silver badges62 bronze badges
add a comment |
Buying and shorting on margin requires 50% margin.
If you short 100 shares at $100 the you have:
$10,000 Market Value
$ 5,000 Equity
$15,000 Credit
Margin is Equity/Market Value = 50%
The Minimum Margin Maintenance Requirement for NASDAQ and NYSE stocks is 25% though brokers can require more (leveraged ETFs require more margin). The MMMR is Credit/1.25 = $12,000. At $120 per share, you'll have 25% margin ($3,000/$12,000):
$12,000 Market Value
$ 3,000 Equity
$15,000 Credit
In the old days, if you modestly breached the MMMR, brokers would give you a warning and up to 3 days to meet the margin call. These days, the computers at online brokers monitor the margin level closely and they tend to close violations out, often with poor fills. Some might give you the opportunity to transfer other in house assets into your margin account to meet the margin call.
If your position sky rockets and blows through the remaining 25% of margin with no opportunity to close (for example, a buy out offer), your position will be closed ASAP by the broker. The lender of the shares does not take the hit. The broker does and will chase you legally.
answered 7 hours ago
Bob BaerkerBob Baerker
23.6k2 gold badges36 silver badges62 bronze badges
add a comment |
Buying and shorting on margin requires 50% margin.
If you short 100 shares at $100 the you have:
$10,000 Market Value
$ 5,000 Equity
$15,000 Credit
Margin is Equity/Market Value = 50%
The Minimum Margin Maintenance Requirement for NASDAQ and NYSE stocks is 25% though brokers can require more (leveraged ETFs require more margin). The MMMR is Credit/1.25 = $12,000. At $120 per share, you'll have 25% margin ($3,000/$12,000):
$12,000 Market Value
$ 3,000 Equity
$15,000 Credit
In the old days, if you modestly breached the MMMR, brokers would give you a warning and up to 3 days to meet the margin call. These days, the computers at online brokers monitor the margin level closely and they tend to close violations out, often with poor fills. Some might give you the opportunity to transfer other in house assets into your margin account to meet the margin call.
If your position sky rockets and blows through the remaining 25% of margin with no opportunity to close (for example, a buy out offer), your position will be closed ASAP by the broker. The lender of the shares does not take the hit. The broker does and will chase you legally.
answered 7 hours ago
Bob BaerkerBob Baerker
23.6k2 gold badges36 silver badges62 bronze badges
Buying and shorting on margin requires 50% margin.
If you short 100 shares at $100 the you have:
$10,000 Market Value
$ 5,000 Equity
$15,000 Credit
Margin is Equity/Market Value = 50%
The Minimum Margin Maintenance Requirement for NASDAQ and NYSE stocks is 25% though brokers can require more (leveraged ETFs require more margin). The MMMR is Credit/1.25 = $12,000. At $120 per share, you'll have 25% margin ($3,000/$12,000):
$12,000 Market Value
$ 3,000 Equity
$15,000 Credit
In the old days, if you modestly breached the MMMR, brokers would give you a warning and up to 3 days to meet the margin call. These days, the computers at online brokers monitor the margin level closely and they tend to close violations out, often with poor fills. Some might give you the opportunity to transfer other in house assets into your margin account to meet the margin call.
If your position sky rockets and blows through the remaining 25% of margin with no opportunity to close (for example, a buy out offer), your position will be closed ASAP by the broker. The lender of the shares does not take the hit. The broker does and will chase you legally.
answered 7 hours ago
Bob BaerkerBob Baerker
23.6k2 gold badges36 silver badges62 bronze badges
edited 5 hours ago
answered 7 hours ago
Bob BaerkerBob Baerker
23.6k2 gold badges36 silver badges62 bronze badges
answered 7 hours ago
Bob BaerkerBob Baerker
23.6k2 gold badges36 silver badges62 bronze badges
answered 7 hours ago
Bob BaerkerBob Baerker
23.6k2 gold badges36 silver badges62 bronze badges
23.6k2 gold badges36 silver badges62 bronze badges
add a comment |
add a comment |
This is why the broker will require you to keep some 'margin' in your account. Ie: you need a positive investment position for the broker to loan you any funds.
So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left. Your broker will have specified in their agreement with you, that you have $x or y% margin remaining at all times, or else they will simply liquidate your account.
So with only $2k left in margin, perhaps the broker will decide that there is too much risk for them, and they will sell your $10k of investments on your behalf, covering off their own $8k losses incurred by your short, and giving you $2k in cash as the remaining balance.
The other option may be for the broker to give you a warning that you need to deposit further funds in your account, to avoid it being liquidated like this.
answered 8 hours ago
Grade 'Eh' BaconGrade 'Eh' Bacon
21.5k9 gold badges56 silver badges77 bronze badges
Sure, the broker will take steps to make uncoverable shorts less likely, what I am asking is what happens if despite those precuations a short cannot be covered.
– Peter Green
8 hours ago
1
Your answer discusses what precautions there are to make sure the short is covered, but it doesn't explain what happens if it can't, which is what the question asks.
– Acccumulation
8 hours ago
"So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left." It doesn't work that way (subtracting the loss from the initial margin equity). As share price increases (the short position is losing), the market value of the position increases by X. At the same time, equity is reduced by the appreciation in the short position (initial equity minus X). A $20k short supported by $10k in cash or marginable securities would have $4k of upside at 25% margin.
– Bob Baerker
7 hours ago
add a comment |
This is why the broker will require you to keep some 'margin' in your account. Ie: you need a positive investment position for the broker to loan you any funds.
So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left. Your broker will have specified in their agreement with you, that you have $x or y% margin remaining at all times, or else they will simply liquidate your account.
So with only $2k left in margin, perhaps the broker will decide that there is too much risk for them, and they will sell your $10k of investments on your behalf, covering off their own $8k losses incurred by your short, and giving you $2k in cash as the remaining balance.
The other option may be for the broker to give you a warning that you need to deposit further funds in your account, to avoid it being liquidated like this.
answered 8 hours ago
Grade 'Eh' BaconGrade 'Eh' Bacon
21.5k9 gold badges56 silver badges77 bronze badges
Sure, the broker will take steps to make uncoverable shorts less likely, what I am asking is what happens if despite those precuations a short cannot be covered.
– Peter Green
8 hours ago
1
Your answer discusses what precautions there are to make sure the short is covered, but it doesn't explain what happens if it can't, which is what the question asks.
– Acccumulation
8 hours ago
"So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left." It doesn't work that way (subtracting the loss from the initial margin equity). As share price increases (the short position is losing), the market value of the position increases by X. At the same time, equity is reduced by the appreciation in the short position (initial equity minus X). A $20k short supported by $10k in cash or marginable securities would have $4k of upside at 25% margin.
– Bob Baerker
7 hours ago
add a comment |
This is why the broker will require you to keep some 'margin' in your account. Ie: you need a positive investment position for the broker to loan you any funds.
So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left. Your broker will have specified in their agreement with you, that you have $x or y% margin remaining at all times, or else they will simply liquidate your account.
So with only $2k left in margin, perhaps the broker will decide that there is too much risk for them, and they will sell your $10k of investments on your behalf, covering off their own $8k losses incurred by your short, and giving you $2k in cash as the remaining balance.
The other option may be for the broker to give you a warning that you need to deposit further funds in your account, to avoid it being liquidated like this.
answered 8 hours ago
Grade 'Eh' BaconGrade 'Eh' Bacon
21.5k9 gold badges56 silver badges77 bronze badges
This is why the broker will require you to keep some 'margin' in your account. Ie: you need a positive investment position for the broker to loan you any funds.
So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left. Your broker will have specified in their agreement with you, that you have $x or y% margin remaining at all times, or else they will simply liquidate your account.
So with only $2k left in margin, perhaps the broker will decide that there is too much risk for them, and they will sell your $10k of investments on your behalf, covering off their own $8k losses incurred by your short, and giving you $2k in cash as the remaining balance.
The other option may be for the broker to give you a warning that you need to deposit further funds in your account, to avoid it being liquidated like this.
answered 8 hours ago
Grade 'Eh' BaconGrade 'Eh' Bacon
21.5k9 gold badges56 silver badges77 bronze badges
answered 8 hours ago
Grade 'Eh' BaconGrade 'Eh' Bacon
21.5k9 gold badges56 silver badges77 bronze badges
answered 8 hours ago
Grade 'Eh' BaconGrade 'Eh' Bacon
21.5k9 gold badges56 silver badges77 bronze badges
answered 8 hours ago
Grade 'Eh' BaconGrade 'Eh' Bacon
21.5k9 gold badges56 silver badges77 bronze badges
21.5k9 gold badges56 silver badges77 bronze badges
Sure, the broker will take steps to make uncoverable shorts less likely, what I am asking is what happens if despite those precuations a short cannot be covered.
– Peter Green
8 hours ago
1
Your answer discusses what precautions there are to make sure the short is covered, but it doesn't explain what happens if it can't, which is what the question asks.
– Acccumulation
8 hours ago
"So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left." It doesn't work that way (subtracting the loss from the initial margin equity). As share price increases (the short position is losing), the market value of the position increases by X. At the same time, equity is reduced by the appreciation in the short position (initial equity minus X). A $20k short supported by $10k in cash or marginable securities would have $4k of upside at 25% margin.
– Bob Baerker
7 hours ago
add a comment |
Sure, the broker will take steps to make uncoverable shorts less likely, what I am asking is what happens if despite those precuations a short cannot be covered.
– Peter Green
8 hours ago
1
Your answer discusses what precautions there are to make sure the short is covered, but it doesn't explain what happens if it can't, which is what the question asks.
– Acccumulation
8 hours ago
"So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left." It doesn't work that way (subtracting the loss from the initial margin equity). As share price increases (the short position is losing), the market value of the position increases by X. At the same time, equity is reduced by the appreciation in the short position (initial equity minus X). A $20k short supported by $10k in cash or marginable securities would have $4k of upside at 25% margin.
– Bob Baerker
7 hours ago
Sure, the broker will take steps to make uncoverable shorts less likely, what I am asking is what happens if despite those precuations a short cannot be covered.
– Peter Green
8 hours ago
Sure, the broker will take steps to make uncoverable shorts less likely, what I am asking is what happens if despite those precuations a short cannot be covered.
– Peter Green
8 hours ago
1
1
Your answer discusses what precautions there are to make sure the short is covered, but it doesn't explain what happens if it can't, which is what the question asks.
– Acccumulation
8 hours ago
Your answer discusses what precautions there are to make sure the short is covered, but it doesn't explain what happens if it can't, which is what the question asks.
– Acccumulation
8 hours ago
"So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left." It doesn't work that way (subtracting the loss from the initial margin equity). As share price increases (the short position is losing), the market value of the position increases by X. At the same time, equity is reduced by the appreciation in the short position (initial equity minus X). A $20k short supported by $10k in cash or marginable securities would have $4k of upside at 25% margin.
– Bob Baerker
7 hours ago
"So if you have 10k of investments in your account, and a short that has lost 8k in value, you have 2k in 'margin' left." It doesn't work that way (subtracting the loss from the initial margin equity). As share price increases (the short position is losing), the market value of the position increases by X. At the same time, equity is reduced by the appreciation in the short position (initial equity minus X). A $20k short supported by $10k in cash or marginable securities would have $4k of upside at 25% margin.
– Bob Baerker
7 hours ago
add a comment |
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1
"If the broker is the one who normally takes the hit what if the broker can't cover it either?" If your short losses were big enough to bankrupt your broker, now that would be quite an event.
– JB Chouinard
6 hours ago
Such blunder only happens in third world country that doesn't control the short during Asia economic crisis. Now every countries broker set a threshold for shorting.
– mootmoot
6 hours ago
Broker borrows shares from in house account. If shares not available in house then he borrows them from another broker with lendable shares. You need to distinguish covering the short from having the margin to cover the short. If stock is trading, it is buyable and the short is coverable. If the trader's account lacks the margin to pay for covering it then the broker closes out existing positions in the account to cover the deficit (long and short). If that is insufficient to cover the cost of the purchase then the broker chases the trader legally for any outlay made by the broker.
– Bob Baerker
5 hours ago