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XIII. SHORT SALES

XIII. SHORT SALES. A. DEFINITIONS. Short Sale – The sale of a stock without actually owning the shares Covered Short – Borrowing shares from a brokerage firm before selling Naked Short – Selling stock without actually owning or borrowing the shares

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XIII. SHORT SALES

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  1. XIII. SHORT SALES

  2. A. DEFINITIONS • Short Sale – The sale of a stock without actually owning the shares • Covered Short – Borrowing shares from a brokerage firm before selling • Naked Short – Selling stock without actually owning or borrowing the shares • Covering the Short – Buying the shares back that were previously sold • Hypothecation – allowing shares to be borrowed by other customers for purchases and sales

  3. Margin Account – A type of stock account, set up with a brokerage firm, that allows you to borrow money against the securities in the account – allows brokerage firms to charge interest to short sellers on borrowed stock Called Away – Where borrowed shares must be returned so that they can be sold by the owner, occurs when sales of a security greatly exceed purchases A. DEFINITIONS

  4. Short Interest – The volume of shares of stock in a security that have been sold short (uncovered shorts) • Short Ratio: • Short Interest • -------------------- • Average Daily Trading Volume of the Security A. DEFINITIONS

  5. Short as a Percentage of Float • Shares Sold Short • -------------------------------------- • Total Number of Shares Available to the Public • for Trading A. DEFINITIONS

  6. Stock is borrowed from another stockholder through a brokerage firm • Short sales generally require additional capital as security for the sale • Initial Margin – the dollar value of cash or securities that the brokerage firm requires the investor to deposit in his or her account before executing a short sale • Maintenance Margin – the dollar value of cash or securities that the brokerage firm requires the investor to hold in his or her account while the short sale remains open B. THE MECHANICS OF SHORT SALES

  7. The proceeds from the sale are credited to the seller’s account and frozen until the short position is closed • The seller must pay any dividends that the stock pays to the actual stock owner until the short position is closed • The short position is closed when the short seller purchases stock on the market to return to the actual stock owner • Short sales are profitable when the stock declines in price, otherwise the short seller looses money B. THE MECHANICS OF SHORT SALES

  8. Liabilities and Account Holder’s Equity Assets C. EXAMPLES OF SHORT SALES

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