When you short a biotech stock, or any stock, you are selling shares that you do not own with the intention of buying them back at a lower price. This process inherently involves significant risk, as your potential losses are theoretically unlimited if the stock price rises indefinitely.
In a margin account, short selling requires borrowing the shares from your broker, which involves using leverage. Your broker will set a margin requirement, which is the minimum equity amount you must maintain in your margin account. If the stock price rises and your account equity falls below this minimum, you’ll receive a margin call, requiring you to deposit more funds or securities into your account to cover the shortfall.
A margin call does not limit your liability; rather, it demands that you fulfill your obligations by bringing your account back to the required equity level. If you can’t meet the margin call, your broker can liquidate your assets to cover the deficit, potentially selling other securities you hold, which could lead to further financial losses.
Therefore, while a margin call is a mechanism to protect brokers from loss, it does not limit your liability. Instead, it serves as a prompt to address or mitigate risk exposure. Short selling requires careful risk management, particularly in volatile sectors like biotechnology, where stock prices can be very unpredictable due to factors like scientific breakthroughs or regulatory changes.
No responses yet