What is a short sale of a stock?
When an investor believes that the price of a stock is going to fall, he can attempt to profit by executing a “short sale.” Reversing the age-old investment advice of “buy low, sell high,” in a short sale you first sell high, then you buy low.AgreementA short sale begins with an investor identifying a stock he thinks is overpriced. He then borrows a certain number of shares, often from a broker, and signs a contract agreeing to replace those shares later on.TransactionsThe investor immediately sells the borrowed shares at the current market price. When the time comes to return the shares, the investor must buy them at the current market price.Profit or LossIf the market price has fallen, the difference between the stock’s original price and its current price becomes profit for the investor. If the price has risen, the investor will lose money.RiskShort selling carries high risk. If an investor is “short” on a stock that suddenly gets hot, his losses can pile up quickly. Indeed, an inve
