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If I short sell stocks of a company but do not close my position by buying them back, what will happen? I realize it is a bad thing, but what exactly? I will need to pay a penalty?

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You would generally have to pay interest for everyday you hold the position overnight.

If you never close the position and the stock price goes to zero, you will be closed out and credited with your profit.

If you never close the position and the stock price keeps going up and up, your potential loss is an unlimited amount of money.

Of course your broker may close you out early for a number of reasons, particularly if your loss goes above the amount of capital you have in your trading account.

  • This question was pointed to as same as a new one. This answer is great. But I'd add one point - the number of shares available for shorting is not unlimited. Behind the scenes, if the owner of your borrowed shares needs them back for whatever reason, they need to be borrowed from elsewhere. At some point, your broker may not find shares available and your position might be forced to close. Victor, if you want to edit into your answer, I'll kill my comment. +1 – JoeTaxpayer Aug 13 '15 at 14:53
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2 things may happen.

  • Either your positions are closed by the broker and the loss or profit is credited to your account.

  • Else it is carried over to the next day and you pay interest on the stocks lent to you.

What happens will be decided by the agreement signed between you and your broker.

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