The practice of a seller, anticipating a decline in the price of a security, selling securities that the seller does not own, with the intention of acquiring the securities at a lower price in the future. The seller has a "short position" from the time the seller sells the securities until the time the seller acquires the securities.

A short sale includes any sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller. In order to deliver the security to the purchaser, the short seller may borrow the security, typically from a broker-dealer or an institutional investor. The short seller later closes out the position by purchasing equivalent securities on the open market, or by using an equivalent security it already owns, and returning the security to the securities lender.

In general, short selling is used to:

"Naked short selling" refers generally to an investor selling short without having guaranteed that securities are available for delivery to the buyer. Essentially, in a naked short sale, the short seller does not formally borrow the securities before shorting nor does the seller have a positive confirmation that the dealer is in a position to lend the shorted securities.

For more information on the mechanics and regulation of short selling, see Practice Notes, Short Selling: Regulation and Reporting and Regulation M: What the Deal Team Needs to Know.