What is a short sale?

A short sale refers to the sale of a security that the seller does not own, with the intent to repurchase it later at a lower price. This strategy is typically employed when an investor believes that the price of a stock is going to decline. In a short sale, the seller borrows shares of the stock from another investor or a brokerage firm and sells them on the open market. The goal is to buy back the same number of shares at a later date, ideally at a lower price, thus profiting from the difference in price.

If the price does decline as anticipated, the investor can close the position by buying back the shares at the lower price, returning them to the lender, and keeping the profit. Short selling carries a high risk, as if the stock price rises instead of falls, the seller may face substantial losses when trying to buy back the shares to cover the position.

A short sale is distinct from other trading strategies. For example, the immediate purchase of stock followed by a resale does not involve borrowing shares and selling them short, while a long-term investment strategy generally focuses on buying and holding securities for an extended period without the concept of selling borrowed shares. Finally, purchasing shares with margin trading refers to buying securities with borrowed funds