When purchasing an investment security through a short sale, which of the following statements is correct?

• A. The investor is not required to return the borrowed securities to the lender.
• B. The investor immediately owns the security and is entitled to dividends.
• C. The investor sells borrowed securities with the intention of buying them back at a lower price.
• D. The investor purchases the security at a discount directly from the issuing company.

Answer: (C)

Verified step by step guidance

1. Understand the concept of a short sale: A short sale occurs when an investor borrows securities (such as stocks) from a lender and sells them on the open market, with the intention of repurchasing them later at a lower price to return to the lender.
2. Clarify the investor's obligations: In a short sale, the investor is required to return the borrowed securities to the lender. This is a key aspect of the transaction.
3. Explain ownership and dividends: The investor does not own the securities during a short sale and is not entitled to dividends or other benefits associated with ownership.
4. Highlight the intention behind the transaction: The primary goal of a short sale is to profit from a decline in the security's price. The investor sells the borrowed securities at a higher price and aims to repurchase them at a lower price later.
5. Address the incorrect statement: The investor does not purchase the security directly from the issuing company at a discount. Instead, the securities are borrowed from another party, typically facilitated by a brokerage firm.