Short Sale - Two Definitions
There are two definitions of short sale. One deals with stocks and the other with real estate. They’re common in one respect, at least. They both involve assets depreciating in value.
Equity short sales - making money from a loser
A equity short sale is a bet that a stock will decrease in price. An investor borrows a stock from someone else and agrees to return it to them at some future time. Before they return it, though, the borrower sells the stock into the market. He or she is betting that the stock will decrease in value and they can buy it back later at a lower price. They then return the stock to the original owner.
You can short individual stocks or short an entire index using ETFs. Either way there is one significant difference between long and short positions. In a long position, you can lose your entire investment, at most. In a short position, you can actually lose more than your investment because there is no limit to the potential up side of a stock price.
Real estate short sales - avoiding foreclosure
A real estate short sale is when a bank forgives part of a loan. If a homeowner has a mortgage that is greater than the value of the home, the bank can permit the ‘owners’ to sell the house and forgive the difference. It’s basically an admission by the bank that it made a bad loan.
A short sale in this case is really making the best out of a bad situation for everyone. The seller loses the house, but doesn’t suffer the negative effects of foreclosure. The bank doesn’t have to go through the foreclosure process and possibility mitigates its losses.
August 16th, 2007 at 7:46 am
[…] covered the definition of a short sale in a previous post, but this is a refresher. A short sale is the sale of a house that has a […]