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What is Short Selling?

Definition of Short Selling

Short selling is the selling of a security that the seller does not own. Short selling is a three-step process and it involves: first, borrowing shares in a company (either from a broker or by directly contacting the stock owner); second, immediately selling the shares at the prevailing market price; and, third, buying the shares later when the price has dropped so that the investor can keep the difference after the shares have been returned to their original owner. Short selling is typically done when someone is convinced that the price of a security will decline and as such would be able to repurchase it at a later date for a lesser price, resulting in a profit. For traders who use online trading facilities, there is no need to go through any process involving the borrowing of stock, but rather the short trade can be executed by hitting the bid price on the screen shown by the internet trading platform with exactly the same ease of execution as conducting buy trades by taking the offer price on the screen.
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