Refers to the selling of securities, commodities, or foreign exchange that is not actually owned by the seller. In making a short sale, the seller hopes to "cover," that is, buy back the item sold at a lower price and thus earn a profit. Selling short is most commonly associated with stock transactions in which positions are established by borrowing shorted securities from the broker who handled the transaction. At a later time, the short is covered and purchased stock is used to return the borrowed securities. Short sales of securities are regulated by the Securities and Exchange Commission and margin requirements are set by the Federal Reserve Board. Selling short is not a popular activity among securities investors and total volume seldom exceeds a few days' trading volume in the typical case. Dealers and exchange specialists routinely engage in selling short to accommodate customers and to maintain orderly markets. Short-term traders also engage in selling short in an attempt to take advantage of imbalances in the marketplace.
Selling short against the box, a form of hedging, involves selling equal shares of a stock owned by a shareholder in order to protect a profit and to carry the profit into a later tax year. In terms of dollar volume, selling short commodities and currencies far exceeds that of stock transactions.
commodity short sales short sales accomplished in the futures market. A speculator wishing to take advantage of an expected decline in a commodity can sell a large quantity of the commodity for future delivery. In such transactions, the required down payment is only 8 percent to 10 percent of the contract value which offers the speculator high leverage. A small decline in the commodity results in a large return on the speculator's investment. High risk is involved, since a modest increase in the commodity price can wipe out the speculator's down payment which generates a margin call, that is, a call for additional capital. If the speculator cannot meet the call he or she is sold out, usually at great loss. A long position in commodities involves similar high risk if maximum margin is used.
