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Curious Cat Investing Dictionary: Short Selling

Short Selling - selling stock that you don't own. To do so you must borrow the stock from the broker (who offsets it with stock owned by other customers). An investor will "sell sort" when they expect the price to decline, thus they will sell high and buy low at a later date. It can also be used as a hedge strategy when the investor believes other investments they own may go down (but they don't want to sell those investments for some reason - perhaps selling would trigger taxes) and so they will gain on the short sale offsetting losses on the other investment.

The securities act of 1933 requires short sales to be made on an uptick in price. This is to prevent short sales from causing a run on the stock. Market makers are not bound by such short sale rules.

Selling short
  • Hedge - An investment taken not purely for its own sake but to offset other investments in a portfolio. The concept is to reduce the size of losses. Thus it is a strategy to reduce losses which will also reduce the potential gains.
  • Short Squeeze - a rapid price increase which forces short sellers to buy to cover their position. They can be physically forced to buy due to margin calls or "forced" to buy to limit their losses.
  • Cover (buy to cover) - buying the security that was short
  • Short Interest - the total shares sold short for a given security. Normally these totals are reported monthly.
  • Sort Interest Ratio (sort ratio, short interest) - a ratio of the total shares sold short divided by the total shares.
  • Days to cover - total shares sold short divided by the average daily volume.
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Curious Cat Investing Library
Dictionary: PE ratio, Dollar Cost Averaging , Balance Sheet
Topics: China - Economics - Real Estate - Trading
Great Investors Focus: Darvas - Livermore - O'Neil - Soros
Authors: Levitt - Schwager Investment Bookstore