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short position. The initial cash or equity reserves of your account in most cases must be at least 100% of the amount needed to cover your short position plus some cushion for possible surges in the stock price (these are all part of margin rules). As the stock price moves beyond the value of your account equity, you will receive a maintenance call to infuse more equity into your account. If you do not satisfy the maintenance call, your broker may liquidate your account to cover your short position. So while technically your potential losses could be infinite when shorting stocks, there are safety measures in place to insure proper coverage of your short position at all times.

My advice: stay away from shorting. It’s too risky for the average investor. If you believe that a certain stock may lose its value within a certain time frame and you want to profit from this fact, buy “put options” instead, which can limit your loss to the original investment. We will cover options in the next chapter. One general rule regarding stock shorting is that the investor is only allowed to short a stock while the stock is rising (the uptick rule). This rule was put in place by the SEC (Securities and Exchange Commission) to prevent considerable drops in stock prices during shorting frenzies.

In general short sellers are considered a bane on a stock, causing artificial and violent price fluctuations. During a period of frenzied short selling a stock price could plummet uncontrollably. On the other hand, unbridled short squeeze (covered later) periods have the opposite effect, propelling the stock price to irrational levels. At times companies may ask their stockholders to register their shares in order to choke off the available pool of unregistered shares which can be used for shorting. This could stem the potential violent price fluctuations which can be resulted from short selling activities. …