Short selling involves the sale of a security not owned by the investor at the time of sale. The investor can arrange to have her broker borrow the stock from someone else, and the borrowed stock is delivered to implement the sale. To cover her short position, the investor must subsequently purchase the stock and return it to the party that lent the stock. The investor benefits if the price of the of the security sold short declines. Two costs will reduce the profit on a short sale. First, a fee will be charged by the lender of the stock. Second, if there are any dividends paid, the short seller must pay those dividends to the lender of the security.
Exchanges impose restrictions as to when a short sale may be executed; these so-called tick-test rules are intended to prevent investors from destabilizing the price of a stock when the market price is falling. A short sale can be made only when either (1) the sale price of the particular stock is higher than the last trade price (referred to as an “uptick trade”), or (2) if there is no change in the last trade price of the particular stock (referred to as a “zero uptick”), the previous trade price must be higher than the trade price that preceded it.

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