What Does 'Selling Short' Mean in the Stock Market?
In a short sale of stock, the seller sells stock, believing that stock will diminish in value, and subsequently buys it, theoretically at a lower price. The short seller then keeps the difference.
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Short Sale Stock
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A short seller typically selects stocks because he believes they will decrease in value. Short sellers look for overvalued stocks, companies with diminishing returns, or general market conditions that may precede a drop in the value of multiple stocks.
Short Sale Mechanics
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In a typical short sale, the seller tells a broker or other lender to "sell" stock when he doesn't yet own it. The lender vouches for the seller, and the sale puts the seller in a "short" position. Then the seller must obtain the stock and pay back the lender, typically within a short time. Usually, the lender can force the seller to cover at any point.
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Profits from Shorting
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Because a short seller believes his stock will drop, he theoretically makes money off the difference between the selling price and the lower buying price when he actually obtains the stock. However, a seller must often pay interest on the temporary "loan" of stock to the lender/broker who assisted with the sale.
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