Investment Management Certificate Practice Exam 2025 – Complete Prep Guide

Short selling is a trading strategy where an investor borrows securities, typically shares of stock, and sells them on the market with the intention of buying them back later at a lower price. The key aspect of this strategy is the anticipation that the price of the borrowed securities will decline, allowing the investor to repurchase them at a reduced cost. By selling high and buying low, the investor can realize a profit from the difference.

This method involves a level of risk because if the price of the security increases instead of decreasing, the investor would face a loss when repurchasing the securities at a higher price. Short selling relies on the expectation of falling prices and is typically executed in volatile markets where significant fluctuations are expected.

The other options describe different concepts or strategies. One incorrectly suggests that short selling is about buying stocks in anticipation of price drops, which misrepresents the fundamental mechanics of short selling. Another option refers to making immediate profits from selling stocks, which does not capture the essence of selling borrowed securities. Lastly, the idea of reducing risk by holding onto securities longer is not related to short selling, as this strategy explicitly involves selling borrowed assets in hopes of capitalizing on price declines.