Question 88—Risk Factors in Shorting
Answer 4 Selection “A stock might crash” is incorrect.
A crash is profitable for shorts, whereas a rally leads to a loss. If the company whose stock a trader sold short declares a dividend, it goes to the person who bought that stock. Now the short-seller must reimburse the owner, whose shares he borrowed, for the cost of that dividend. If the owner decides to sell his stock and the broker cannot find another owner willing to lend his stock to a short-seller, that short-seller will be forced to cover earlier than planned in order to return the borrowed shares.
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