A short sale is a term used in investment, in both stocks and real estate.
It means when you sell something at a loss for some reason or another. Usually, you are willing to take the loss either because you really need the money right away or because you no longer want to deal with the responsibility of having the stock or property.
If you are selling real estate, more than likely you are dealing with a property that you borrowed money to buy. Real estate can be very expensive, even for a small place.
For that reason, you probably will be taking on a mortgage (borrowing money or taking on debt) to buy it. Let’s say that you buy the house for $100,000. In general, the bank would ask you to pay at least $20,000 as a down payment, meaning that you pay that much so you have a stake in the house.
That means you need to borrow at least $80,000. If the value of the house stays the same or even goes up, you would have nothing to worry about. However, if it goes down, you have a tricky situation if you want to sell the house.
Say that you are only able to sell the house for $90,000, which can cover the mortgage but leaves less than you paid. Normally you would reject the price because you lose money, but if there is a special case, you would have no choice. You have to accept the offer and lost $10,000.
That is a real estate short sale – it is pretty straightforward.
With stocks, a short sale is a bit more complicated. The investor in this case borrows some stock that someone else owns.
Let’s say that they borrow stock from their friend – 100 shares that cost $1 each. They want to make money with it, with the promise that whatever happens – if the price of the shares increases or decreases, they will return 100 shares to their friend.
They sell the stock if they think that the price will decrease. If they think, for example, that the price of the shares will drop from $1 to $0.80, they will sell their 100 shares for $100 cash.
When the price of the stock actually does drop, they have the $100 to buy the stock again. This time, since each share costs only $0.80, they can buy 125 shares, 25 more than they originally had.
They can give the 100 shares back to their friend, and keep the 25 extra shares or the $20 for themselves.
27 Meanings of Most Common Text Abbreviations [Image]
