What is the definition of a "short sale"?

A short sale is defined as the sale of borrowed securities with the expectation that the price of those securities will decline in the future. In this strategy, an investor borrows shares of a stock that they do not own from a broker, sells those shares in the market at the current market price, and then hopes to repurchase the same shares later at a lower price. If successful, the investor can return the borrowed shares to the broker and pocket the difference as profit.

This method is often used when investors anticipate a decrease in the stock's price, allowing them to profit from market downturns. It carries risks, as if the stock price rises instead of falls, the investor could incur significant losses, potentially unlimited, since there is no ceiling to how high a stock's price can rise.

Understanding this process is critical in finance because it highlights investor behavior in different market conditions and the complexities involved in trading strategies.