This is directly from the S.E.C. website on information about . .
A short sale
is generally a sale of a security by an investor who does not actually
own the stock. To deliver the security to the purchaser, the short
seller will borrow the security. The short seller later closes out the
position by returning the security to the lender, typically by
purchasing securities on the open market. In general, short selling is
utilized to profit from an expected downward price movement, to provide
liquidity in response to buyer demand, or to hedge the risk of a long
position in the same or a related security. The SEC has
traditionally held the belief that protections against abusive short
selling are important for issuer and investor confidence and has
enacted prophylactic rules designed to curb manipulative behavior. For
information on short sale restrictions — and short sales generally —
please read Key Points About Regulation SHO,
which the staff of the Division of Market Regulation prepared. This
document describes short sales (including naked short sales), discusses
legal and compliance issues, and provides links to helpful resources.
If you scroll down to Section V, you’ll also find answers to the
questions investors most frequently ask about short sales. In addition, Rule 105 of Regulation M
governs short sales immediately prior to offerings where the sales are
covered with offering shares. Specifically, Rule 105 prevents persons
from covering short sales with offering securities purchased from an
underwriter, broker, or dealer participating in the offering if the
short sale was effected during the Rule's restricted period, which is
typically five days prior to pricing and ending with pricing. Its aim
is to promote offering prices that are based upon open market prices
determined by supply and demand rather than artificial forces. In this
way, the Rule safeguards the integrity of the capital raising process.
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