General Securities Representative (Series 7) Practice Exam – Your All-in-One Guide to Exam Success!

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What does "short selling" entail in trading?

Buying securities with the anticipation that prices will rise

Selling securities that are owned with the anticipation that prices will fall

Buying options contracts to profit from price fluctuations

Selling borrowed securities with the intention of repurchasing them at a lower price

Short selling involves selling securities that the seller does not own, specifically by borrowing them from another party. The core concept behind this strategy is that the seller anticipates a decline in the price of the security. By borrowing and selling the securities at the current market price, the seller aims to repurchase them later at a lower price, returning the borrowed shares to the lender and pocketing the difference in price as profit.

This strategy is considered speculative and is often used by traders who believe that a stock is overvalued. It enables investors to attempt to profit from falling markets or from specific stocks that they expect will decrease in value. The success of short selling hinges on the accuracy of the trader's predictions about price movements, highlighting the inherent risks involved in such transactions.

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