Selling stock short means borrowing stock through the brokerage firm and selling it at the current market price, which the short seller believes is due for a downturn. The plan is to buy the borrowed stock back later for less, allowing the investor to keep the difference between the two prices.
Individual investors often avoid this strategy because it involves many practical headaches. For example, the brokerage firm must approve the account for short sales. Then the position requires establishing an initial margin deposit and a readiness to shore it up whenever necessary. The short seller is also responsible for paying any dividends that occur during the time the stock is borrowed.
And if the stock becomes involved in a takeover transaction or undergoes a volatile period for any reason, it might increase the likelihood that the stock lender will demand the return of the stock. Covering the short means buying the stock at the market price, even if it results in large losses.
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