What Is the Concept of “Collateral” in a Short-Selling Transaction?

Collateral in a short-selling transaction is the capital that a short seller must deposit with their broker or exchange to cover potential losses. Since the theoretical loss in a short position is unlimited, the collateral acts as a security deposit.

If the price of the shorted asset rises, the short seller's collateral is used to cover the loss. The collateral amount is subject to maintenance margin requirements, and if the collateral falls below this level, a margin call is triggered.