Short selling

What is short selling?

There are essentially two types of short selling: covered and uncovered (naked).

Covered short selling—in a covered short sale, the trader borrows the securities from a holder (lender) in return for a fee, and sells them to a purchaser. If the price of the securities falls, the trader buys the required number of securities in the market, and, if successful, makes a profit from the difference between the original price the securities were loaned for and the price at which the securities were bought back. The steps of the transaction are set out below:

1. •

   trader borrows securities from the lender in return for a fee

2. •

   trader sells securities to a purchaser

3. •

   as the deadline for returning