Definition of short sale

A trading strategy aimed at taking advantage of an expected fall in prices. An investor, normally via a broker, sells shares that are not actually held but have been borrowed from another investor or broker. This process is called short selling, selling short or shorting.

The shares have to be bought back so they can be returned to the lender. If the price has fallen as expected, the amount paid to buy the shares back will be lower than the amount received for selling them, and the investor has made a profit.  If the price goes up, the investor has made a loss.

The process of buying back the shares is called short-covering, basically covering a short position. It is normal to see active short-covering in a market that has been falling for a while but suddenly turns up, putting pressure on the short-sellers who have not yet bought back their shares and must rush to cut their potential losses. This situation is called a short squeeze.

The total amount of shares of a particular company that have been sold short and have yet to be bought back is called the short interest for that stock.

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