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Trading

Short Selling

Short selling is a strategy of borrowing shares to sell them at the current price, aiming to buy them back later at a lower price and profit from the decline.

A short seller borrows shares from a broker, sells them on the open market, and hopes to repurchase them more cheaply later to return to the lender. The difference is the profit, minus borrowing costs.

The risk is uniquely dangerous: while a stock can only fall to zero, it can rise without limit, so losses on a short position are theoretically unbounded. A rapid rally can force a short squeeze that compounds the pain.

Investors short to bet against overvalued companies or to hedge other positions. Because it profits from falling prices, short selling adds a dimension of risk management and speculation beyond simply buying stocks.

Example

A trader who shorts a stock at $100 and buys it back at $70 pockets the $30 difference per share, before costs.

Related terms

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Short Selling — FAQ

What is Short Selling?

Short selling is a strategy of borrowing shares to sell them at the current price, aiming to buy them back later at a lower price and profit from the decline.

Can you give an example of Short Selling?

A trader who shorts a stock at $100 and buys it back at $70 pockets the $30 difference per share, before costs.

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