Shortselling

In a shortsale, an investor sells a security that he does not own. One intent of a shortsale is to sell the security at current prices, expecting to buy the security back at a lower price in the future. To carry out the shortsale, the shortseller borrows certificates of ownership from another investor who owns the security (see Figure 8.1). The shortseller must pay the lender of the certificates any dividends due on the securities. When the shortseller closes out the shortsale by buying the security in the market, the new certificates are returned to the individual who lent the securities to the shortseller. The shortseller makes a profit (loss) if the securities are repurchased at a lower (higher) price. A shortsale has no time limit. Short positions can remain in effect indefinitely as long as collateral requirements (discussed below) are met.