Short Sales

An investor, who believes that a stock price has appreciated too far and is likely to decline, may profit from this belief by selling the stock short. In a short sale, the customer borrows the security in order to complete delivery to the buying party. The investor sells the stock high hoping that they can buy it back cheaper and replace it. It is a perfectly legitimate investment strategy. The investor’s first transaction is a sell and they exit the position by repurchasing the stock. The short sale of stock has unlimited risk because there is no limit to how high the stock price may go. The investor will lose money if the stock appreciates past their sales price.

Affirmative Determination

All firms and agents are required to make an affirmative determination for all sell orders entered on behalf of the firm or a customer. All sell orders must be marked either long or short. A person is considered long the security if the investor:

  • Has possession of the security
  • Has purchased the security but the trade has not settled
  • Has issued conversion or exercise instructions for a right, warrant, option, convertible bond or preferred stock
  • If the investor owns rights, warrants, options, or a convertible security but has not issued exercise or conversion instructions the investor is not considered long the security.

The firm must make a determination if the customer is long the security or if they are selling short. If the customer is selling short, the firm must determine if the security can be borrowed for delivery.

An investor is only considered long the security to the extent of their net long position in the security. If an investor is long 1000 shares of ABC and is short 600 shares of ABC in another account, the investor may only mark a sell ticket for 400 shares of ABC long. 

CIRCUIT BREAKERS

Related Articles
  1. Trading

    Guide to Short Selling

    Want to profit on declining stocks? This trading strategy does just that.
  2. Investing

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  3. Difference Between Short Selling And Put Options

    Short selling and put options are used to speculate on a potential decline in a security or index or hedge downside risk in a portfolio or stock.
  4. Investing

    The Truth About Naked Short Selling

    The media demonizes naked short selling, but it usually occurs after a collapse, not before.
  5. Financial Advisor

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
  6. Investing

    How To Short Amazon Stock

    With the stock reaching all-time highs and the company gambling on several new business lines, many investors may feel it's a good time to short sell Amazon.
Frequently Asked Questions
  1. What is the difference between cost and price?

    Cost is typically the expense incurred for a product or service being sold by a company. Price is the amount a customer is ...
  2. Do stocks have a negative price-to-earnings ratio?

    A stock can have a negative price-to-earnings ratio (P/E). A negative P/E ratio means the company has negative earnings or ...
  3. What are the main advantages of using moving averages (MA)?

    See why moving averages have proven to be advantageous for traders and analysts and useful when applied to price charts and ...
  4. What is the on-balance volume (OBV) formula and how is it calculated?

    Read about the formula and calculation for on-balance volume (OBV), which is a technical indicator showing movements in trading ...
Trading Center