Selling Short Law and Legal Definition

Selling short is a term used in finance to refer to certain stock transactions. Selling short is accomplished by an investor who:

  1. Decides that a company's stocks will decline in value.
  2. Borrows some of those stocks, usually from a broker.
  3. Sells those stocks at the current price, making a lot of money.
  4. Watches the market.
  5. When the value of the stock goes down, buys enough stocks to return to the broker. The investor is buying the stocks at a much lower price than before, so even though they have to pay out money, they are going to be left with a profit.
  6. Gives the replacement stocks back to the broker. The investor has now "closed the short sale."