Short Selling: Definition, Process, and Risks

What is the main goal of a short seller?

• Buy low and sell high later

• Sell high first and buy back lower to profit

• Hold shares for long-term dividends

• Avoid paying any fees or interest

In short selling, what does the trader initially borrow?

• Cash from the market

• Shares of stock from a broker

• Bonds from investors

• Options contracts from an exchange

• $100

• $150

• $200

• $300

Which step happens immediately after borrowing shares in the selling short process?

• Return the shares to the broker

• Wait for the price to rise

• Sell the borrowed shares and receive the proceeds

• Pay taxes on dividends

Which market movement benefits a short position?

• Stock price rises significantly

• Stock price drops after the sale

• Stock price stays exactly the same

• Market closes early

What must the short seller eventually do with the borrowed shares?

• Keep them permanently

• Return the same number of shares to the broker

• Exchange them for bonds

• Convert them into cash

Which cost is specifically listed as a risk for short sellers?

• Manufacturing costs

• Interest charged by the broker

• Real estate taxes

• Shipping fees

Why does timing matter in short selling, according to the risks section?

• The longer you wait, the more interest you pay, which lowers profit

• Stocks cannot be traded after noon

• Prices always rise in the afternoon

• Brokers only lend shares for one day

Place these actions in the correct order for short selling: 1) Buy back shares, 2) Borrow shares, 3) Sell borrowed shares, 4) Return shares to broker.

• 2, 3, 1, 4

• 3, 2, 1, 4

• 2, 1, 3, 4

• 1, 2, 3, 4

In the diagram showing price movement, what happens if the stock rises after you short sell?

• You win because profits increase

• You break even automatically

• You lose because buying back costs more

• You owe no money to the broker