This section is from the book "Money And Investments", by Montgomery Rollins. Also available from Amazon: Money and Investments.
Selling something which you do not own with the expectation that the market price of the same will decline so that the security or commodity can be bought at a less price in season to fill the order; those in possession of advance information regarding a stock, or who think it too high, "go short" of that stock - sell for future delivery - to profit by the anticipated drop in price. The most noted example was in the case of the Northern Pacific Railway stock, the "selling short" of which caused so much misery on May 9, 1901. Certain bankers in New York had obtained control of most of the Northern Pacific stock. This was unknown to the public at large. An impression spread about that Northern Pacific was very high and that there would be a decline in price; the result was that many people sold it "short" There was much more stock sold in this way than there was stock in existence outside of that held by the bankers above mentioned, and the people who had sold "short" were unable, therefore, to buy enough to meet their contracts. The result was that the stock rapidly advanced, numerous failures resulted of concerns who were unable to fill their orders at any price, and, in other cases, an enormous advance in price was paid by people who did succeed in filling their orders.
The query will naturally arise as to how delivery may be made in the event of one's selling what he does not possess. For an explanation of this, turn to "Borrowing Stock."
 
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