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against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce or through the mails must be registered with the SEC. |
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Short interest The total number of shares of a security that have been sold short (see Short selling) by customers and securities firms. |
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Short positions Stock shares that an individual has sold short and has not covered as of a particular date. |
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Short-sale rule The Securities and Exchange Commission rule requiring that short sales be made only in a rising market; also called plus tick rule. A short sale can be transacted only under one of these two conditions: (1) if the last sale was at a higher price than the sale preceding it (called an uptick or plus tick), or (2) if the last sale price is the same as the preceding sale which was an uptick (called a zero-plus tick). The short-sale rule was designed to prevent abuses perpetuated by so-called pool operators, who would drive down the price of a stock by heavy short selling and then pick up the shares for a large profit. |
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Short selling The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short selling is a legitimate trading strategy. Short sellers assume the risk that they will be able to buy the stock at a more favorable price than the price at which they sold short. |
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Sale of a security not owned by the seller: A technique used (1) to take advantage of an anticipated decline in the price or (2) to protect a profit in a long position. |
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An investor borrows stock certificates for delivery at the time of a short sale. If the seller can buy that stock later at a lower price, a profit results; if the price rises, however, a loss results. |
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An investor borrows stock certificates for delivery at the time of short sale. If the seller can buy that stock later at a lower price, a profit results; if the price rises, however, a loss results. A commodity sold short represents a promise to deliver the commodity at a set price on a future date. Most commodity short sales are covered before the delivery date. |
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Example of a short sale involving stock: An investor, anticipating a decline in the price of XYZ shares, instructs his or her broker to sell short 100 XYZ, which is trading at $50. The broker then loans the investor 100 shares of XYZ, using either its own inventory, shares in the margin account of another customer, or shares borrowed from another broker. These shares are used to make settlement with the buying broker within five days of the short-sale transaction, and the proceeds are used to secure the loan. The investor now has what is known as a short positionthat is, he or she still does not own the 100 XYZ shares and, at some point, must buy the shares to repay the lending broker. If the market price of XYZ drops to $40, the investor can buy the shares |
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