( 1 ) Risk and return are not equal
The disparity between risk and return is the inherent risk of shorting. Theoretically speaking, when an investor goes long a stock, the maximum loss is when the stock price drops to 0 , that is, the loss ratio is 100% ; but when an investor goes short a stock, the stock price will continue to go up relative to the short price. There is no limit to the upside, so there is no limit to its potential loss, which may be 200% , 300% or even higher.
( 2 ) Time cost
Short selling must consider the time factor. On the one hand, because short-selling operations generate interest every day, the cumulative cost increases over time; on the other hand, the biggest uncertainty in short-selling also comes from time. If investors hold short positions for a long time, they may face rising stock prices. risk.
( 3 ) Interest rate risk
It should be noted that after the short order is placed, the short interest rate still changes. The final interest paid by the investor will be calculated based on the actual daily interest rate starting from T+2 , and will be aggregated and settled on the third trading day of each month. No one can pre-determine the short interest rate. If the short-selling congestion of individual stocks increases significantly during the period of holding a short position, resulting in a substantial increase in interest rates, investors need to bear the increased short-selling costs; in some cases, this may lead to a loss of short positions.
( 4 ) Recall and liquidation
In short operations, the relationship between short investors and lenders is not equal. The stock lender reserves the right to request the stock recall at any time. If a recall occurs, the brokerage firm will try to replace the previously borrowed stock with the stock borrowed from another lender. If the stock cannot be borrowed, a formal recall will be initiated. Recalls usually use volume weighted average price ( VWAP ) orders to close customers' short positions.
In addition, if the stock price continues to rise after the stock is borrowed, the margin requirement for the stock will also continue to increase. In the event of insufficient margin, a liquidation will be triggered. If a stock with a high proportion of short positions rises sharply, it is likely to cause many short investors to rush to close their positions within the same period of time, leading to further stock price increases.
( 5 ) Corporate actions
Certain corporate actions (such as mergers and acquisitions, acquisitions, dividends, etc.) may cause short-selling rates to increase.
For example, when a company announces dividends, it usually leads to a decrease in the supply of stocks on the market, which may lead to an increase in securities lending rates.
( 6 ) Delisting and suspension
When a stock is delisted or suspended, investors may not be able to fill their short positions because the stock cannot be traded, and it will be terminated until the stock is delisted or the stock resumes trading. This process can last for days, months or even longer, especially when the company goes bankrupt and liquidates the longest. During this period, investors have to continue to pay securities lending fees based on the stock’s delisting price or the closing price of the stock on the most recent trading day, which may be very high.
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