In investing, a short sale is defined as a transaction where the investor doesn’t actually have ownership of the stock in question. Instead, the stock is borrowed from the dealer through which the sell order is placed. The investor who places the short sale has the obligation to buy back the asset in the future. A short sale is a type of margin transaction that sees an investor borrowing money in order to make an investment. Furthermore, the reserve requirements for these sales are significantly more specific than for other types of investments.

Fund management businesses and custody banks often lend shares for the purpose of short sales in order to bring in some extra income. The primary purpose of short selling is to allow an investor to earn a profit from a dip in the value of an asset. The goal of a short sale is to offload shares when the price is at its height and quickly buy back when the price drops. A short sale transaction is usually executed when it’s believed that the price of an asset will decrease over the short term. This type of investment is seen as a risky strategy as there’s feasibly no limit on the losses that can result as the price of a stock can go up infinitely. There’ are many ways to mitigate these risks such as stop-loss orders.

Eager to learn more about short sales? Reach out to Lacy Financial for more information. We can even execute these transactions on your behalf.