short selling

short selling
The practice of selling securities not owned by the seller in the hope that the price subsequently falls and they can then be bought back at a lower price. The seller may have borrowed the necessary securities on a temporary basis in order to deliver the stock to the buyer, or may not hold them at all (referred to as a naked short). In both cases, the related security must be purchased at a later stage to close out the transaction.
+ short selling
USA
The practice of a seller, anticipating a decline in the price of a certain security, selling securities that he does not own, with the intention of acquiring the securities at a lower price in the future. The seller has a "short position" from the time when the securities are sold until the time when the seller acquires the securities. A short sale includes any sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller. In order to deliver the security to the purchaser, the short seller may borrow the security, typically from a broker-dealer or an institutional investor. The short seller later closes out the position by purchasing equivalent securities on the open market, or by using an equivalent security it already owns, and returning the security to the lender. In general, short selling is used to profit from an expected downward price movement, to provide liquidity in response to unanticipated demand, or to hedge the risk of a long position in the same security or in a related security. "Naked short selling" refers generally to an investor selling short without having guaranteed that securities are available for delivery to the buyer. Essentially, in a naked short sale, the short seller does not formally borrow the securities before shorting nor does the seller have a positive confirmation that the dealer is in a position to lend the shorted securities. In addition, the short seller does not meet the standard requirement for settlement by delivery of shares within three days of the trade (T+3).
Refer to Practice Note, Short Selling: Regulation and Reporting (www.practicallaw.com/0-384-8335) for detailed information on short selling, including an example of the actual mechanics of a short sale.

Practical Law Dictionary. Glossary of UK, US and international legal terms. . 2010.

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