How does short selling typically work?

• A. The investor borrows shares from another investor, sells them, and promises to return the shares later; brokerage firms facilitate borrowing; not all stocks can be shorted.
• B. The investor buys shares on margin and holds them for a long period.
• C. The investor sells shares they own to realize profits immediately.
• D. The investor hedges using only derivative instruments.

Answer: (A)

Short selling is about selling shares you don’t own yet by borrowing them first, with the plan to buy them back later to return to the lender. Your broker arranges or locates shares to borrow, you sell those borrowed shares in the market, and you must eventually buy back the same amount to replace what you borrowed. You’re hoping the price will drop so the later purchase costs less than what you sold for, leaving you with a profit after accounting for borrowing costs and any dividends you owe during the loan. Not all stocks can be shorted at all times because some shares aren’t available to borrow or may require special arrangements.

The other options describe different strategies that don’t match short selling: buying on margin and holding long is buying with leverage on shares you own; selling shares you already own is simply selling your current position; hedging with derivatives can be part of a strategy, but it isn’t the basic mechanism of short selling itself.