Business Glossary

selling securities (or commodities futures contracts) not owned by the seller. The investor (seller) earns a profit when the market price of the security declines, and loses money when the purchase price is higher than the original selling price. To make a short sale, the broker borrows stock and loans it to the investor. Later on, hopefully when the market price is lower, the investor buys the shares to repay the lending broker. Assume an investor sells short 50 shares of stock having a market price of $25, for a total of $1250. The broker borrows the shares and holds onto the proceeds of the short sale to secure the loan and satisfy margin requirements. Later on, the investor buys the stock at $20 a share, repays the 50 shares, earning a per share profit of $5, or a total of $250.

Investors "sell short against the box" when they sell short shares they actually own ( not borrowed shares). Short sales against the box may occur so that a loss is minimized or the tax consequences of a long sale may be postponed to a subsequent tax year.

securities borrowed from a broker's inventory, other margin accounts, or from other brokers, when a customer makes a short sale and the securities must be delivered to the buying customer's broker. As collateral, the borrowing broker deposits with the lending broker an amount of money equal to the market value of the securities. No interest or premium is ordinarily involved in the transaction. The Securities and Exchange Commission requires that brokerage customers give permission to have their securities used in loan transactions, and the point is routinely covered in the standard agreement signed by customers when they open general accounts.

selling securities (or commodities futures contracts) not owned by the seller. The investor (seller) earns a profit when the market price of the security declines, and loses money when the purchase price is higher than the original selling price. To make a short sale, the broker borrows stock and loans it to the investor. Later on, hopefully when the market price is lower, the investor buys the shares to repay the lending broker. Assume an investor sells short 50 shares of stock having a market price of $25, for a total of $1250. The broker borrows the shares and holds onto the proceeds of the short sale to secure the loan and satisfy margin requirements. Later on, the investor buys the stock at $20 a share, repays the 50 shares, earning a per share profit of $5, or a total of $250.

Investors "sell short against the box" when they sell short shares they actually own ( not borrowed shares). Short sales against the box may occur so that a loss is minimized or the tax consequences of a long sale may be postponed to a subsequent tax year.