Short Sales
In finance short selling (also known as shorting or going short) is the practice of selling securities or other financial instruments that are not currently owned, with the intention of subsequently repurchasing them ("covering") at a lower price. In the event of an interim price decline, the short seller will profit, since the cost of repurchase will be less than the proceeds received upon the initial (short) sale. Conversely, the short seller will incur a loss in the event that the price of a shorted instrument should rise prior to repurchase. The potential loss on a short sale is theoretically unlimited in the event of an unlimited rise in the price of the instrument, however in practice the short seller will be required to post margin or collateral to cover losses, and any inability to do so on a timely basis would cause its broker or counterparty to liquidate the position. In the securities markets, the seller generally must borrow the securities in order to effect delivery in the short sale. In some cases, the short seller must pay a fee to borrow the securities and must additionally reimburse the lender for cash returns the lender would have received had the securities not been loaned out. Historically, short selling is going against the upward trend of the stock market, with the S&P 500 and S&P 90 index realizing an average gain of approximately 9.77% return between 1926 and 2011.
Short selling is most commonly done with instruments traded in public securities, futures or currency markets, due to the liquidity and real-time price dissemination characteristic of such markets and because the instruments defined within each class are fungible.
In practical terms, going short can be considered the opposite of the conventional practice of "going long", whereby an investor profits from an increase in the price of the asset. Mathematically, the return from a short position is equivalent to that of owning (being "long") a negative amount of the instrument. A short sale may be motivated by a variety of objectives. Speculators may sell short in the hope of realizing a profit on an instrument which appears to be overvalued, just as long investors or speculators hope to profit from a rise in the price of an instrument which appears undervalued. Traders or fund managers may hedge a long position or a portfolio through one or more short positions.
Read more about Short Sales: Concept, History, Mechanism, Fees, Dividends and Voting Rights, Risks, Views of Short Selling, See Also
Famous quotes containing the words short and/or sales:
“A short letter to a distant friend is, in my opinion, an insult like that of a slight bow or cursory salutation—a proof of unwillingness to do much, even where there is a necessity of doing something.”
—Samuel Johnson (1709–1784)
“The elephant, not only the largest but the most intelligent of animals, provides us with an excellent example. It is faithful and tenderly loving to the female of its choice, mating only every third year and then for no more than five days, and so secretly as never to be seen, until, on the sixth day, it appears and goes at once to wash its whole body in the river, unwilling to return to the herd until thus purified. Such good and modest habits are an example to husband and wife.”
—St. Francis De Sales (1567–1622)