To sell a security that one does not own. The security must then be bought back at a later date. For example: Bill believes that XYZ Corp. will go down in value so he sells short 1,000 shares at $20 per share. Bill is correct and the stock goes down to $15, Bill then buys back the shares at $15 each and has a profit of $5,000. On the other hand, if Bill had been wrong the stock could have gone up, exposing him to unlimited risk.
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