What is a short sale?

What is a short sale?

A short sale is the sale of a security not owned by an investor, which the investor has borrowed from the broker in order to sell.

An investor can use his broker to give him the ability to sell shares that he does not have in his inventory. The investor believes that the stock price will be lower in the near future, and will replace the borrowed shares by purchasing them at the (possibly) lower price in the future.

A short sale gives the investor a position in which he can profit from a decline in the price of a security. An investor must generally meet margin requirements to engage in short selling.

The broker will lend shares from its own inventory or use shares from another investor's margin account. The investor can generally choose how long he would like to retain the short position.

A broker may charge interest or fees or commission for the ability to short sell, and hypothetically this could result in a margin call if the investor does not have adequate margin, or the brokerage may force the investor to cover their position. Covering means to replace the number of shares which were loaned for the short sale.