A trader can establish two types of short positions including a naked and a covered short. The former involves selling an asset without actually owning it and this method is illegal in the US-based financial markets. Taking a covered short position involves borrowing the shares from a stock loan department and paying borrow-fee while the short position is open.
When it comes to shorting, it is very important to understand that this technique carries a limited profit potential and an unlimited loss potential. This is why investors are advised to be particularly careful when establishing a short position.
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