Short sale - Financial definition
Concise definition of the term short sale
A short sale is a financial transaction where an investor sells borrowed securities with the intention of buying them back later at a lower price to profit from the price decline.
Comprehensive definition of the term short sale
In the context of financial markets, a short sale involves borrowing shares from a broker and selling them on the open market, betting that their price will drop. If the price falls, the investor buys the shares back at the lower price, returns them to the lender, and pockets the difference as profit. This strategy is often used by hedge funds and experienced traders to speculate or hedge against potential declines in the value of securities.
Short selling carries significant risks, including the potential for unlimited losses if the stock price rises instead of falls. It is subject to regulatory requirements and market practices such as the uptick rule in the United States, which aims to prevent excessive downward pressure on a stock's price.