Short Selling
What is Short Selling?
Short selling is borrowing an asset to sell it now, hoping to buy it back later at a lower price and pocket the difference.
Short sellers profit when prices fall and lose when prices rise. Losses are theoretically unlimited because a price can keep climbing. Shorting adds information and liquidity but is riskier than ordinary buying.
Short Selling: a worked example
A trader borrows 200 shares of Copperline Media and sells them at $60, collecting 200 × $60 = $12,000. The stock falls to $44, so she buys 200 shares back for 200 × $44 = $8,800, returns them to the lender, and keeps $12,000 minus $8,800 = $3,200, less the borrowing fee. Run it the other way: the stock climbs to $95, closing the position costs 200 × $95 = $19,000, and she loses $7,000 on a trade whose best possible outcome was $12,000. That ceiling arrives only if Copperline falls to zero. The loss has no ceiling at all.
The mistake students make with short selling
The instinct is to picture a short as an ordinary trade run backwards, with symmetric risk. It is not symmetric. Buying Copperline at $60 caps the loss at $60 a share, because the price stops at zero, while shorting it caps the gain at $60 and leaves the loss open ended as the price climbs. Margin rules sharpen the problem: a rising price deepens the loss and demands more collateral at the same time, so a short seller can be closed out at the top of a squeeze even when the original thesis was right.
Short Selling questions
How do you make money when a stock goes down?
Short selling is the standard way to profit from a falling price. The seller borrows shares from a broker, sells them at today's price, and later buys the same number back to return, keeping the difference if the price fell. Selling 200 borrowed shares at $60 and repurchasing at $44 nets $3,200 before fees. Put options produce a similar payoff with a known maximum loss, namely the premium paid.
What is a short squeeze?
A short squeeze is a rapid price rise driven by short sellers buying shares to close their positions. Because closing a short requires buying, any jump in price pushes some sellers to cover, and their buying pushes the price higher still, which forces the next group out. Margin calls accelerate the loop, since brokers demand more collateral exactly when the position is worst. Heavily shorted stocks with few borrowable shares squeeze hardest.
Why is short selling allowed?
Short selling is permitted because it lets negative information reach prices. If only owners could trade, a stock could only be talked up, and investors who thought a company was overvalued or dishonest could do nothing but stay away. Short sellers have a financial incentive to dig for accounting problems that nobody else is paid to find, and their trading adds liquidity for buyers. Regulators still restrict the practice at the edges, banning naked shorts and pausing shorting in some falling markets.
Related terms
Common comparisons
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