What is a short position?

A short position refers to a strategy used by investors when they anticipate a decline in the price of a security. By borrowing a security and selling it, the investor aims to repurchase it later at a lower price to return it to the lender. This process allows the investor to capitalize on the expected decrease in value, generating a profit from the difference between the selling and repurchase prices.

This concept is integral to financial markets, particularly in trading and investment strategies, as it exemplifies a method of profit generation that contrasts with traditional approaches like buying stocks with the hope of appreciating value. It's essential to understand that while this strategy can be profitable if executed correctly, it also carries the risk of unlimited losses if the price of the security rises instead of falling.

The other options describe different investment strategies that do not align with the concept of a short position. For instance, the purchase of an asset expecting its value to increase represents a long position, while investing in long-term stocks and bonds emphasizes a buy-and-hold strategy that is fundamentally different from short selling. Additionally, the direct ownership of physical commodities pertains to asset ownership rather than the borrowing and selling dynamic central to a short position.