Short selling is a bet a stock or market will go down. Short selling is the sale of a security that the seller has borrowed on margin. The short seller believes that the price of the stock will go down, enabling him to buy the stock back at a lower price to make a profit.
A short seller borrows through a broker, who is holding the securities for another investor who owns the securities; the broker himself seldom purchases the securities to lend to the short seller. The lender does not lose the right to sell the securities while they have been lent, as the broker will usually hold a large pool of such securities for a number of investors which can instead be transferred to any buyer. In most market conditions there is a ready supply of securities to be borrowed, held by pension funds, mutual funds and other investors.
The act of buying back the securities that were sold short, to close out the trade, is called “covering the short” or “covering the position”.<< Back to Glossary Index