short sale

The sale of a security that one does not own but has borrowed in anticipation of making a profit by paying for it after its price has fallen.

A market transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal amount of shares at some point in the future.

The payoff to selling short is the opposite of a long position. A short seller will make money if the stock goes down in price, while a long position makes money when the stock goes up. The profit that the investor receives is equal to the value of the sold borrowed shares less the cost of repurchasing the borrowed shares.

Investopedia Says:
Suppose 1,000 shares are short sold by an investor at $25 apiece and $25,000 is then put into that investor's account. Let's say the shares fall to $20 and the investor closes out the position. To close out the position, the investor will need to purchase 1,000 shares at $20 each ($20,000). The investor captures the difference between the amount that he or she receives from the short sale and the amount that was paid to close the position, or $5,000.

There are also margin rule requirements for a short sale in which 150% of the value of the shares shorted needs to be initially held in the account. Therefore, if the value is $25,000, the initial margin requirement is $37,500 (which includes the $25,000 of proceeds from the short sale). This prevents the proceeds from the sale from being used to purchase other shares before the borrowed shares are returned.

Short selling is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales because this strategy includes unlimited losses. A share price can only fall to zero, but there is no limit to the amount it can rise.

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Sale of a security or commodity futures contract not owned by the seller; a technique used (1) to take advantage of an anticipated decline in the price or (2) to protect a profit in a Long Position (see Selling Short Against the Box).

An investor borrows stock certificates for delivery at the time of short sale. If the seller can buy that stock later at a lower price, a profit results; if the price rises, however, a loss results.

A commodity sold short represents a promise to deliver the commodity at a set price on a future date. Most commodity short sales are Covered before the Delivery Date.

Example of a short sale involving stock: An investor, anticipating a decline in the price of XYZ shares, instructs his or her broker to sell short 100 XYZ when XYZ is trading at $50. The broker then loans the investor 100 shares of XYZ, using either its own inventory, shares in the Margin Account of another customer, or shares borrowed from another broker. These shares are used to make settlement with the buying broker within five days of the short sale transaction, and the proceeds are used to secure the loan. The investor now has what is known as a Short Position-that is, he or she still does not own the 100 XYZ and, at some point, must buy the shares to repay the lending broker. If the market price of XYZ drops to $40, the investor can buy the shares for $4,000, repay the lending broker, thus covering the short sale, and claim a profit of $1,000, or $10 a share.

Short selling is regulated by Regulation T of the Federal Reserve Board. See also Lending At a Rate; Lending At a Premium; Loaned Flat; Margin Requirement; Short Sale Rule.

1. Sale of a security not owned in anticipation of making a profit by purchasing the security later at a lower price, and delivering the security in completion of the short sale. The trade is completed by delivery of a borrowed certificate that is delivered to the buyer, completing the transaction at the time of the original sale. A regular way short sale occurs when the seller has no other position in the security; a short sale against the box occurs when the seller has an offsetting long position and wants to postpone tax losses until the following year. The box is securities industry jargon for securities owned by the seller, but held in safekeeping by a Broker-Dealer.

2. In futures, taking a market position by selling a futures contract in a financial instrument not owned by the seller, in anticipation of a price decline.

A method of gaining profit from an anticipated decline in the price of a stock.

An individual who sells short sells either stock or securities that he or she does not own and that are not immediately ready for delivery. Generally the seller borrows the shares needed to cover the sale from a broker and then delivers these shares to the buyer. The seller deposits an amount that is equal to the value of the borrowed shares with the broker. This amount stays on deposit with the broker until the stock is returned. The seller must ultimately return the same number of shares of the same stock to the broker, and the transaction is not fully executed until the stock is returned. The broker lending the stock is entitled to all the benefits he or she would have received if the stock had not been lent. When a dividend is paid, then the seller-borrower is required to pay the broker-lender an amount equal to the dividend.

Borrowing shares of stock from a brokerage firm (see broker) and then selling in the expectation that the price of the stock will decline. If it does, the borrower buys them back at a reduced price, returns them to the brokerage, and makes a profit. If it rises, the investor loses money. To sell short is to “short” a stock.