Short Selling

Financial Dictionary -> Investing -> Short Selling

In real estate short selling is when somebody sells their home but the revenue made does not cover the remaining balance on the mortgage. This happens if house prices fall way below the original buying price or if various debt issues have caused the mortgage to rise over the years. It is not uncommon for a mortgage lender to let the borrower off the remaining amount because it could end up costing more going through the courts and the foreclosure process. They may also maintain the loan but reduce the amount owed to a realistic sum so the borrower can pay it back under their new circumstances.

If all parties agree on the Short Sale then nobody's credit rating is affected like it would be during the foreclosure process.

In investment a short sale is when somebody borrows a security or asset from a broker (middle man) and sells it, but is obligated to buy it back and return it to the broker under an agreed amount of time. The main purpose of this is to make a profit by buying it back at smaller price, thus analysis of the market has to be undertaken to ensure the risk of losing money isn't high.
This method is generally used by investors, who borrow stock from a broker at a high price that they predict will fall, sell it quickly at market value then buy it back having made a profit at this later date when the value of it is lower. Once returned, the broker will return it to the lender. There are various fees involved that the broker may charge.

This is considered a very risky technique in that the losses are unlimited. The value of a stock can skyrocket if something the investor couldn't foresee happens.