Going Short: A Comprehensive Guide to Its Legal Definition
Definition & Meaning
Going short, also known as short selling, refers to the practice in finance where an investor sells securities that they have borrowed from another party. The goal is to profit from a decline in the price of those securities. If the price drops, the investor can buy back the securities at a lower cost, return them to the lender, and keep the difference as profit. This strategy is often used by traders who anticipate a decrease in market value.
Legal Use & context
Going short is primarily used in the context of financial markets and trading. It is relevant in areas such as securities law and financial regulation. Investors engaging in short selling must comply with various legal requirements, including borrowing securities properly and adhering to regulations set by bodies like the Securities and Exchange Commission (SEC). Users can manage some aspects of short selling through legal templates available on platforms like US Legal Forms.
Real-world examples
Here are a couple of examples of abatement:
Example 1: An investor believes that the stock of Company A, currently priced at $100, will drop. They borrow shares and sell them. If the price falls to $80, they buy back the shares, return them to the lender, and profit $20 per share.
Example 2: An investor shorts a stock but the price unexpectedly rises. They must buy back the shares at a higher price, resulting in a loss. (hypothetical example)