Short Sales is the borrowing of stock from brokers and then selling it in the market, with the hope that a profit will be earned by buying it back (“covering the short”) after it has fallen in price.
It is a tricky tactic to gain quick profit while keeping the losses at bay. It would require near-perfect timing on the investor’s part as s/he would have to manage to sell the stock when the price is high being sure that it would fall drastically. Then buy it back as soon as the price of the security drops.
Steps in a Short Sale
There is a step-by-step procedure that includes this kind of sale and without the entire procedure, it is nearly impossible to understand short sales. The steps are stated below -
- Borrow stocks or securities from the broker
- Sell it when the price is high
- Buy it back when the price drops
- Return it to the broker
For example, an investor borrows a stock worth $28000 from the brokerage firm at a loan fee of 4% per year and sells it as soon as the stock price goes up to $35000 after 4 months and this is a short sale. S/he keeps a close eye on that stock market and buys it back as soon as it hits a very low price point of $18000 before returning it to the broker after one year.
Use of the Term in Sentences
- One slip in timing and the short sale will end in a monumental loss.