What is a Short Sale?

A short sale is an investment strategy that is rooted in the hopes that a security will decrease in value. A short sale is also called “shorting” or “going short” and involves selling assets that were borrowed from a separate third party. The plan on a short sale is to purchase the same assets again, buying them at a later time, in order to return the assets to the original lender. This is one of the ways that an investor may make a profit when a security drops in value over a period of time.

Because of this, the investor who wishes to make a profit on a short sale is trying to make money by foreseeing a decrease in the value of these assets. If this happens, the investor will have to pay less to repurchase the assets than the amount originally received when selling the assets. On the other hand, a short seller can also face a loss when the price of these assets increases from when they were sold. There may also be additional costs involved with a short sale. These can include a specific fee paid for borrowing the assets in the first place. There may also be a requirement of any dividends paid on the borrowed assets.

“Going short,” then, can be far different from the more conservative investment plan involved with “going long.” In the latter case, the investor holds the assets and makes a profit chiefly from the increases in their value on the market. As the name would attest, a short sale is a strategy that is in place over a specific period of time. Since the borrowed assets must be repaid, they cannot be held in perpetuity.

I’ve written about short selling before. For more information, click here.

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