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back those shares in the future. If the price of that security starts to rise, short sellers will begin to rush into the market to buy their covering positions. This buying activity forces the price even higher, which brings in more of the short sellers to cover, and on and on. The price keeps climbing. The short squeeze can happen very suddenly and have a devastating affect on the short seller who is slow to react. |
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A quick word about your margin account. Current regulations issued by the Federal Reserve allow investors to have up to one-half of their portfolio on margin. For example, a trader with $100,000 in a trading account could buy up to $200,000 worth of stock. The risk of investing or trading on margin is that it is possible to lose more than your investment, as discussed in selling short. |
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When should you or should you not use your margin privileges? |
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If you are not consistently profitable, why would you accelerate the amount of your losses with leverage? |
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If you are consistently profitableif you can earn more than the interest charge on the margin loanwhy would you not accelerate the amount of your gains with leverage? |
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If the terminology in this chapter seems a bit overwhelming, have a look at the glossary at the end of this book. It may not sound exciting to read a bunch of definitions, but it's a little too exciting to lose a lot of money because you don't understand the instructions here. |
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Following the glossary is a recommended reading list. You can dig deeper into those subjects of interest to you, or those subjects on which you feel you need additional understanding. |
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