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Simply put, a short sale is borrowing a stock from an institution, and selling it on the market with an obligation to cover the sale (return the value of the stock back to the borrowed party).

Now if the price of the stock goes up after you sold it, depending on how wide the margin becomes, you can stay in the contract, but guarantee more cash to the provider so that they are confident you will be able to cover it the future.

If the stock goes down, you can close the contract and return the value of the sale back to the institution, and effectively pocket the retained cash value of the purchase from when you first sold the stock short; turning a profit from a decline in price.

Often times there are companies out there that are running on fumes, overvalued, or are partaking in fraud; short selling is a useful tool that can help the markets discover new information about possibly shaky institutions.

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