What is the primary goal of a short selling strategy?

What is the primary goal of a short selling strategy?

• A. To buy securities at a higher price later
• B. To invest in long-term growth opportunities
• C. To profit from a decrease in the price of a borrowed security
• D. To achieve steady income from dividends

Answer: (C)

The primary goal of a short selling strategy is to profit from a decrease in the price of a borrowed security. In a short sale, an investor borrows shares of a stock and sells them at the current market price, with the expectation that the price will decline. If the price does indeed drop, the short seller can buy back the shares at the lower price, return them to the lender, and pocket the difference as profit. This strategy is built on the belief that certain securities are overvalued and will decrease in value, allowing for profit upon repurchase at a lower cost. The focus on capitalizing on declining stock prices highlights the counterintuitive nature of short selling; unlike traditional investing which seeks to benefit from rising prices, short selling directly targets depreciation, making option C the correct choice.

The primary goal of a short selling strategy is to profit from a decrease in the price of a borrowed security. In a short sale, an investor borrows shares of a stock and sells them at the current market price, with the expectation that the price will decline. If the price does indeed drop, the short seller can buy back the shares at the lower price, return them to the lender, and pocket the difference as profit. This strategy is built on the belief that certain securities are overvalued and will decrease in value, allowing for profit upon repurchase at a lower cost.

The focus on capitalizing on declining stock prices highlights the counterintuitive nature of short selling; unlike traditional investing which seeks to benefit from rising prices, short selling directly targets depreciation, making option C the correct choice.