Series 99: 1.2.2.7.6 Short Selling In A Margin Account

Taken from our Series 99 Top-off Online Guide

1.2.2.7.6 Short Selling in a Margin Account

Short selling is when an investor sells securities that the seller doesn’t actually own—it sells borrowed securities. Investors sell short when they believe the price of a stock will decline. Based on this belief, they sell borrowed stock at a market price and then, in the future, buy back the borrowed shares at a hopefully lower price, pocketing the difference.

Thus, when the sell transaction settles, the seller provides borrowed securities to the buyer, rather than securities it owns. After a certain period of time, the seller will return the borrowed securities by buying the securities in the market at the market price. If the purchase price for the securities is lower than the price of the short sale, the seller makes a profit. If, instead, the purchase price it buys them back at is higher, the seller will have lost money. Thus, investors sell short if they think the price will go down in the future. Short selling is a bearish strategy. Because the purchase price could theoretically go to infinity, causing a short seller to buy the stock back at an infinitely high price, we say that short sellers’ risk is unlimited.

All short sales must take place in margin accounts. Short sales are not allowed in cash

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