Certified Anti-Money Laundering Specialist Certification (CAMS) Practice Exam

What is a Short Sale?

1. A purchase of shares on credit

2. A sale of owned stocks for quick profit

3. The sale of stocks the seller does not own

4. A type of investment that guarantees returns

The correct answer is: The sale of stocks the seller does not own

A short sale refers to the practice of selling stocks that the seller does not own at the time of the transaction. The seller borrows these stocks from a broker or another party and sells them in the market, hoping to buy them back later at a lower price. This approach allows the seller to profit from a decline in the stock's price. By selling stocks that are not owned, the seller is speculating that the price will decrease, which is the essence of short selling. If the stock price does fall, the seller can repurchase the shares at the lower price, return them to the lender, and pocket the difference as profit. However, if the price rises instead, the seller may incur significant losses, as there is theoretically no limit to how high the stock price can rise. The other choices reflect different concepts within trading and investment. Purchasing shares on credit refers to margin trading, while selling owned stocks for quick profit typically describes traditional selling strategies. A type of investment that guarantees returns suggests a misunderstanding of risk in investing, as no investment inherently guarantees returns.