What is a short sale in the context of securities trading?

What is a short sale in the context of securities trading?

• A. The sale of securities that the seller already owns
• B. The sale of a security that is loaned to the seller by the dealer
• C. The sale of securities at a loss
• D. The purchase of securities without initial payment

Answer: (B)

A short sale in securities trading involves selling a security that the seller does not own but has borrowed from another party, typically a dealer or brokerage. In this transaction, the seller anticipates that the price of the security will decline, allowing them to buy it back later at a lower price. The profit is made from the difference between the higher selling price and the lower repurchase price, after returning the borrowed security.

The other options do not accurately describe a short sale. The sale of securities that the seller already owns reflects a traditional sale, not a short sale. Selling securities at a loss refers to the financial outcome of a transaction rather than the mechanics of the sale itself. Finally, the purchase of securities without initial payment does not align with short selling, as short sales specifically involve borrowing securities rather than buying them outright without payment. Therefore, understanding that a short sale entails borrowing securities to sell them is key to grasping how this trading strategy operates within the securities market.