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Short Selling


A client recently asked us if individual investors can do what is called short selling.  Our answer to him was that yes, individual investors can definitely execute short sale trades.  The basic definition of a short sale is when an investor sells a security that they do not own (typically stocks) borrowing the security from someone else (typically through or from their financial institution).  Investors who execute short sales are betting that the value or price of the security they are selling is going to decrease.  If the price does decrease they can exit the trade by buying back the security in the market and giving it back to the original owner to pay off their "loan" at a lower price and keeping the difference as their profit. If, however, the price of the security goes up instead of down, and the investor does not own the security they are shorting their downside and hence risk is unlimited because the price can theoretically go to infinity!  The investor would need to buy back the security in the market at a higher price than they borrowed it for and hence they would have a loss on their trade.

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