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What is selling short?
Short-selling is borrowing an investment and selling it, knowing that later you will have to buy it again so you can return it. In other words, selling short is selling something you don’t really own. You might sell short when you believe the price of a stock will fall in the short run, and you want to profit from the drop. Selling short is very risky. Stocks tend to rise over time, so being a short seller requires good market timing.
Here’s how short-selling works. Say you want to sell short 100 shares of a stock that you think is about to drop. Your broker borrows the shares from someone who owns them, promising you will return them later. You sell the borrowed shares at the current market price. When the price of the shares drops (you hope), you "cover your short position" by buying back the shares at the lower price, and your broker returns them to the lender. Your profit is the difference between the price at which you sold the stock and your cost to buy it back, minus commissions and expenses. If you’re wrong and the stock price skyrockets, your potential losses are unlimited. You must buy the stock back at the market price to cover your short sale, no matter what they cost. Sometimes, you will see a stock price jump dramatically after it has been falling. That may be because short sellers are scrambling to cover their positions.Return to Questions
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