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Short Sale

A transaction by a person who believes a security will decline and sells it, though the person does not own the security. For instance, you instruct your broker to sell 100 shares of XYZ. Your broker borrows the stock so delivery of the 100 shares can be made to the buyer. The money value of the shares borrowed is deposited by your broker with the lender. Sooner or later, you must cover your short sale by buying the same amount of stock you borrowed for return to the lender. If you are able to buy XYZ at a lower price than you sold it for, your profit is the difference between the two prices—not counting commission and taxes. But if you have to pay more for the stock than the price you received, that is the amount of your loss. Stock exchange and federal regulations govern and limit the conditions under which a short sale may be made on a national securities exchange. Sometimes, people will sell short a stock they already own in order to protect a paper profit. This is known as selling short against the box.