Short Selling

C

A short seller loses if stock prices rise. The other choices are true.

Let's go through each statement and determine whether it is true or false:

A. A short sale involves securities the investor does not own. This statement is true. Short selling involves selling securities that the investor does not own. In a short sale, an investor borrows securities from a broker or another investor and sells them in the market with the expectation that the price will decrease. The investor will later repurchase the securities at a lower price and return them to the lender, making a profit from the price difference.

B. According to the uptick rule, a short sale can only trade at a price higher than the previous trade. This statement is false. The uptick rule, which was implemented by some stock exchanges in the past, required that a short sale could only be executed on an uptick or a higher price than the previous trade. However, the uptick rule was abolished by the U.S. Securities and Exchange Commission (SEC) in 2007, removing this restriction on short selling.

C. A short seller loses if the price of the stock sold short falls. This statement is true. In a short sale, the short seller profits if the price of the stock sold short declines. However, if the stock price rises, the short seller incurs a loss. The potential losses in short selling are theoretically unlimited since the stock price can increase indefinitely.

D. A short seller is required to set up a margin account. This statement is true. When engaging in short selling, a short seller is typically required to set up a margin account. A margin account allows the investor to borrow the securities from a broker or another investor and sell them in the market. The short seller must maintain a certain level of margin or collateral in the account to cover any potential losses. The margin requirements ensure that the short seller can fulfill their obligations if the price of the stock sold short rises.

In summary, the false statement regarding short selling is:

B. According to the uptick rule, a short sale can only trade at a price higher than the previous trade.