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Short sales refers to the sale of securities that an investor does not hold currently. Short selling is done when it is anticipated that the price of the security is going to decrease. The investor borrows securities from other investors and sells them at the current market price. Later the securities are bought back from the market and returned to the lenders. If the price has come down, a profit is made, else the short seller has to incur a loss.
As there is a high possibility of default in short selling, a person is not allowed to withdraw all the proceeds from the sale of the securities that have been sold short.
Instead, the price at which the securities have been sold is tallied with the market price at the end of each day. The investor is only allowed to withdraw the profits that have been made. This is called marked-to-market. In case the price of the security increases instead of decreasing the investor has to deposit funds equal to the loss made.
The marked-to-market method way of dealing with short sales ensures that funds are always available to return the securities to those from whom they have been borrowed and an errant investor cannot get rid of his losses by refusing to do so.
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