Ask TheStreet: Don't Get Squeezed

Those are the basics. Now let's go over the specifics regarding short sales and execution rules.

When you designate an order as a short sale, you are borrowing the shares from your broker. Your broker sets up a margin account -- it's a credit that has to be repaid at some time, depending on the discretion of your brokerage firm. An initial investment of $2,000 is mandatory to set up a margin account. You are required to deposit at least 50% of the stock price in the account.

If the stock you are shorting rises, the account is subject to a maintenance margin -- investors have to put more money into the account. The regulations governing margin accounts are a bit more stringent on short sales: For every 20% gain in the stock price, you have to funnel another 30% into the margin account.

While margin requirements vary at different brokerage firms, buying or shorting stocks on margin carries heavy risks for the average investor.

Don't Get Squeezed

Now we get to the squeeze part. When you close out a short sale, known as short-covering, you repurchase the shares and give them back to your broker. Covering your short position at a loss can get ugly during a short squeeze. A squeeze occurs when a stock that has been shorted by many investors rises. More and more short-sellers must buy shares to cover their short positions, putting greater upward pressure on the stock price.