Trading, Accounts & Prohibited ActsQuestion 204 of 398
Which statement about the risk of a short stock position is correct?
a.The maximum loss is limited to the amount invested
b.The potential loss is theoretically unlimited because the stock price can rise without limit
c.There is no risk once the shares are borrowed
d.The maximum loss equals the dividend paid
Explanation
A short seller must eventually buy back the shares. Because a stock's price can rise indefinitely, the potential loss on a short sale is theoretically unlimited, unlike a long position, where the most an investor can lose is the amount invested.
Law Reference: Securities Exchange Act of 1934Practice all 398 questions free — no signup required.
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