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Short Sale

The sale of a security that is not owned by the seller at the time of the trade, necessitating the purchase or delivery some time in the future to "cover" the sale. The strategy is used by investors who believe the stock being sold will decline in value between the time it is sold short and the time it is covered. By being able to cover at a price lower than the short sale price, the investor profits on the difference in price.

To sell short, the investor must borrow stock from a broker to meet the delivery requirements of the sale, which has potential risks. On the delivery date, you either buy the same stock and deliver it to the lender or deliver stock you held but did not want to sell earlier.

For details on using this technique for company stock as a year-end strategy (and the SEC regulations that may restrict you), see a related article elsewhere on this website.

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