Margin call on a short position

What is a margin call?

When you buy stock on margin (i.e. when your broker lends you money to buy stocks) you need to keep a percentage of the whole position in liquid assets (i.e. cash and marginable securities) to ensure that you will pay off the loan made to you. Since what you buy with the borrowed funds is actually a security that varies in price daily, there is a possibility that the money that was loaned to you was used to buy stocks that declined in price. When this happens, since the outstanding loan is for the same amount as originally and you have started to lose money, there might be a situation where your liquid assets (cash and marginable securities) become less than the minimum required. In this case your broker will issue a margin call, indicating to you that you should deposit additional cash and marginable securities to make up for the shortfall. If you fail to do so, your broker will close out your positions bought on margin at their convenience to recover the original loan made to you.

Since shorting only takes place in a margin account, a losing trade (i.e. the stock starts going up) could erode your margin to keep the position open (you start losing money i.e. equity in your account). If your margin goes below the minimum threshold, your broker will issue a margin call that if you don't respond to (or not fully) might entitle your broker to close out your short position as they see fit.