Short selling

Borrowing a security, selling it and later buying it back to return, so as to profit from a fall. The possible loss is unlimited, and the seller must pay the lender any dividends meanwhile.

Where you will meet it

Short selling appears in 7 learning outcomes on the CFA syllabus. A few of them:

• Contrast research on the sell side with the buy side and explain what activist short sellers do
  CFA Level I · Equity Investments

  “Activist short sellers take a short position in a company and then publish research arguing it is overvalued, sometimes alleging fraud or accounting problems.”

• Set out the strategies hedge funds use and how they charge fees
  CFA Level I · Alternative Investments

  “Hedge funds are defined less by what they invest in than by how they are allowed to operate: leverage, short selling and derivatives are available to them, and their investors accept lock-ups and limited transparency in exchange.”

• Name the assumptions behind the Black–Scholes–Merton model for valuing options
  CFA Level II · Derivatives and Risk Management

  “Volatility and the risk-free rate are known and constant, trading is continuous and frictionless, short selling is allowed with full use of proceeds, there are no arbitrage opportunities, and the options are European.”

• Explain how a client's requirements and attitudes toward particular investment risks can be built into an asset allocation
  CFA Level III · Asset Allocation

  “Concern about specific exposures can be addressed directly: hedging a concentrated stock position or human capital tied to one industry, limiting currency or illiquidity risk, excluding sectors on ESG grounds, or capping leverage and short positions.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with S · Glossary