short sale

Short Sale

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 Commentary

Suppose 1,000 shares are short sold by an investor at $25 apiece and $25,000 is then put into their account. Let's say the shares fell to $20 and the investor closed 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 they received in their account from the short sale and the amount they had to pay 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. So if the value was $25,000, the initial margin requirement is $37,500 (which includes the $25,000). This prevents the proceeds from the sale being used to purchase other shares before the borrowed shares are returned.

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

Related Links

Short Selling Tutorial
The Short And Distort - Stock Manipulation In A Bear Market

See also: Bear, Bull Market, Buyback, Naked Shorting, Short, Short Covering, Short Interest, Short Sale Rule, Short Squeeze, Tick Test Rules, Zero Plus Tick

Also spelled: Sell Short, Shorting

short sale

The sale of a security that must be borrowed to make delivery. Short sales usually, but not always, entail the sale of securities that are not owned by the seller in anticipation of profiting from a decline in the price of the securities. A short sale is not permitted when the last preceding different price was higher than the current price. Also called selling short, short. See also fictitious credit, ghost stock, lending at a premium, lending at a rate, odd-lot short sales, Rule 10a-1, short against the box, short cover, synthetic short sale.