Selling Short

A trading technique, wherein an investor, who anticipates a decline in a stock price, borrows shares of that stock from a broker, then sells them, and waits for the share price to drop. If the share prices drop, the investor generally buys back shares at the lower price, and his/her profit equals the difference between the two prices (often minus interest and commission). If share prices rise, the investor may experience a loss. For example, suppose an investor sells 100 shares of borrowed stock valued at $20 per share, and receives $2,000. When the stock drops in price to $15 per share, the investor buys 100 shares for $1,500, and then returns them to the broker having profited $5 per share, or $500. On the other hand, if stock prices had gone up instead of down, and the investor had to sell 100 shares at $25, the loss experienced would be $5 per share or $500.