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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: Patricia Trinchero who wrote (174819)1/2/2009 2:52:28 PM
From: James HuttonRead Replies (1) of 306849
 
When you short, you borrow the shares from your broker. Accounting-wise, the shares and their value show up as a negative in your account, but your cash account is credited the value of the shares. If the value of the shares goes down (good), you can buy them with the cash credited in your account and you will pocket the difference. If the value of the shares goes up (bad), you can buy with the cash in your account, plus the difference between the cash value at which you borrowed the shares and the increased value of the shares. That cash either comes out of your cash account, or you have to sell shares to raise the cash. If the value of the shares goes up too high (very bad) beyond a certain limit, the broker can sell shares (without your knowledge) to raise cash to buy the shares back. In that case you have a loss on the short sale, and you may have a loss on the shares that were sold out of your account without your knowledge.

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