Short Sale

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Definition of 'Short Sale'

A short sale is a transaction in which an investor sells a security that they do not own. This is done by borrowing the security from a broker and then selling it on the open market. The investor then hopes to buy the security back at a lower price and return it to the broker, pocketing the difference.

Short sales are often used by investors to profit from falling stock prices. However, they can also be used to speculate on future price movements.

There are a number of risks associated with short selling. First, the investor is exposed to unlimited losses if the price of the security rises. Second, short sellers must pay interest on the borrowed security, which can eat into their profits. Third, short sellers may be required to close out their positions if the price of the security rises too quickly.

Short sales are not allowed in all markets. In the United States, short sales are only allowed in securities that have a price of $5 or more. Additionally, short sellers must meet certain margin requirements, which are designed to protect investors from losses.

Short selling can be a profitable strategy, but it is important to understand the risks involved before using it.

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