What does short selling involve?

What does short selling involve?

• A. Selling borrowed securities with the intent to buy them back at a lower price
• B. Investing in high dividend yielding stocks
• C. Purchasing securities to hold for the long term
• D. Buying into securities during a downturn

Answer: (A)

Short selling involves selling borrowed securities with the intent to buy them back at a lower price. This strategy is based on the expectation that the price of the security will decline, allowing the short seller to profit. When an investor shorts a stock, they initially borrow shares from another investor and sell them on the market. If the stock price decreases afterward, the short seller can repurchase the shares at this lower price to return them to the lender, thereby realizing a profit from the difference. This method requires a good understanding of market movements and a tolerance for the risks involved, as theoretically, losses can be unlimited if the stock price rises instead of falls. The other options represent different investment strategies that do not align with the essence of short selling, as they focus on acquiring or holding securities rather than profiting from a decline in their prices.

Short selling involves selling borrowed securities with the intent to buy them back at a lower price. This strategy is based on the expectation that the price of the security will decline, allowing the short seller to profit. When an investor shorts a stock, they initially borrow shares from another investor and sell them on the market. If the stock price decreases afterward, the short seller can repurchase the shares at this lower price to return them to the lender, thereby realizing a profit from the difference.

This method requires a good understanding of market movements and a tolerance for the risks involved, as theoretically, losses can be unlimited if the stock price rises instead of falls. The other options represent different investment strategies that do not align with the essence of short selling, as they focus on acquiring or holding securities rather than profiting from a decline in their prices.