Jun 30 2010

What is a short sale?

Category: Finance


In the world of finance, a short sale can have several meanings. It either involves real estate or some type of security.

A real estate short sale is when a lender accepts less for a property than the amount that was originally loaned to the borrower. In these types of transactions, the bank or mortgage company only accepts this action because it is the most economical solution. Foreclosure or continued non payments will actually cost the bank more in the long run, so they accept this less than desirable transaction and outcome.

A security short sale, however, involves the sale of a security that the investor does not own. If an individual believes that the price of a security will decrease, they will typically set up a short sale (borrow the stock and sell it) to benefit from the decline. If the price of the security falls, the investor buys it back at the lower price and collects the difference.

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