Closing a Short Sale
Once you've created a short sale position, you must eventually cover your short sale by delivering shares or repurchasing them in the market. To repurchase, you may choose to execute a buy-to-cover order. This order allows you to buy back shares to cover the shares you sold short.
If you enter a short sale and the market price of the stock falls, you may execute a buy-to-cover order to close out the short position with a potential profit. If the stock price of your short position rises, you may end up closing out the short position at a loss.
If your short position was subject to the short sale rebate fee, interest will stop accruing in your account when the closing trade settles.
Short Sale Examples
When you choose to close your short position or buy back the shares, the stock price may have increased or decreased from the time you placed the short sale order. Let's take a look at what this means.
Stock Price Decrease: This may result in a profit when you buy the shares back at the lower price. The profit will be the difference between your proceeds from the initial sale, and the amount you paid to buy the stock back (excluding commissions and fees).
For example, if you sold 100 shares short at a market price of $10 per share, then bought the same number of shares when the price fell to $8 per share, you would have a $200 profit ($1,000 sale price - $800 purchase price = $200).
Stock Price Increase: This may result in a loss. If this happens, you may have to buy the shares back at a higher price, which will result in an overall loss of the difference between the initial sale and the final stock price (excluding commissions and fees).
For example, if you sold 100 shares short at a market price of $10 per share, then bought back those shares when the price rose to $12 per share, you would have a net loss of $200 ($1,000 sale price - $1,200 purchase price = -$200).