Chartered Market Technician (CMT) Practice Exam 2025 – Your All-in-One Guide to Exam Success!

In the context of short-selling, market risk specifically refers to the possibility that the price of the security being shorted could increase in value. When investors short a stock, they are essentially betting that its price will decline, allowing them to buy back the shares at a lower price and return them to the lender for a profit. However, if the price rises instead, short-sellers are faced with potential losses, as they will still need to buy back the shares but at a higher price than they initially sold them.

This inherent risk of price appreciation is a fundamental aspect of short-selling, making it crucial for traders to manage their positions carefully. The losses from a rising stock price can theoretically be unlimited since there is no upper bound to how high a stock's price can go. Therefore, understanding this aspect of market risk is essential for anyone participating in short-selling activities.