SIE (Securities Industry Essentials) Practice Exam

Jane Investor has decided to sell short ABC stock and later buys it back at a lower price. What does she have?

1. Realized gain

2. Unrealized loss

3. Unrealized gain

4. Realized loss

The correct answer is: Realized gain

When Jane Investor sells short ABC stock and later buys it back at a lower price, she has achieved a realized gain. This occurs because she initiated the short sale by borrowing shares, selling them at the market price, and when she repurchases those shares at a lower price to return to the lender, she profits from the difference between the selling price and the repurchase price. By successfully selling short, Jane effectively locked in her profit when she completed the transaction, which is characterized as a realized gain since she has actually executed both parts of the short sale process: selling high and buying back low. This completion of the transaction moves her ability to profit from a potential short sale from an expectation or possibility to an actual financial result.