What is short selling?

Short selling refers to the practice where an investor borrows securities and sells them on the open market with the intention of buying them back later at a lower price. The key aspect of short selling is that the investor sells securities they do not own; they rely on the price of those securities to drop, allowing them to repurchase them to return to the lender, ideally, at a profit. This strategy can be risky because if the price of the securities rises instead of falling, the investor could face significant losses.

In the context of the other options, purchasing stocks at a lower price refers to traditional buying strategies, which do not involve borrowing or short selling. Holding investments for long-term growth is a fundamental investment strategy that contrasts with the short-term nature of short selling. Finally, the investment strategy of buying low and selling high is a common approach among investors to earn a profit but does not capture the mechanics of short selling, which inherently involves selling first and buying back later. Thus, the emphasis on the sale of securities not owned is what makes the second choice accurate in defining short selling.