Selling Short

The sale of a security that the investor does not own in order to take advantage of an anticipated decline in the price of the security. In order to sell short, the investor must borrow the security from his broker in order to make delivery to the buyer. The short seller will eventually have to buy the security back, or buy to cover, in order to return it to the broker. Short selling is regulated by Regulation T of the Federal Reserve Board and Securities and Exchange Commission rules allow investors to sell short only when a stock price is moving upward. This prevents “pool operators” from driving down a stock price through heavy short-selling, then buying the shares for a large profit.

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