What Does Selling Short a Stock Mean?
- An investor feels that a certain stock is overvalued and will decline over the short term. The investor calls his broker and asks to borrow 100 shares of this stock. After receiving approval to borrow the stock, the investor sells short 100 shares at a price of $19.00 per share. Three months later, the stock is selling for $15.00 per share, and the investor buys 100 shares of stock at this price. The total profit on the trade is $400, calculated as ($19.00 - $15.00) x 100, less the commissions to execute the trade and the interest charged on the borrowing.
- Naked short selling involves the technique described in the example in Section 2, without borrowing the stock prior to executing the short sale. This technique is illegal under U.S. securities laws.