SIE Understanding Trading, Customer Accounts and Prohibited Activities Question 2: Answer and Explanation

Question: 2

Which of the following is a short sale?

• A. A sale of less shares than the quote with the best price
• B. A sale during the last hour of trading
• C. A sale of a security borrowed from another party
• D. A sale of an inverse option

Correct Answer: C

Explanation:

C: Choice C refers to borrowing a security and selling it, typically with the assistance of the seller's brokerage firm. The seller hopes the price will decline, allowing it to be purchased at a price lower than the selling price. At that time, the seller would purchase the security and return it to the party who loaned the security. This is speculative, with an unlimited maximum possible loss, because the price could rise without limit, resulting in a significant loss. Choices A, B, and D are unrelated to the borrowing of a security in order to sell it.