What Is Short Selling?
Short selling lets you profit when an asset's price declines. The mechanics: you borrow shares from your broker, sell them at the current market price, and later buy them back to return to the lender. If the buyback price is lower, the difference is your profit.
Why it's risky:
- Unlimited theoretical loss. A stock can rise without limit, so your loss is unbounded. Longs cap at the initial investment; shorts don't. - Margin calls. Brokers require maintenance margin on short positions. A rising stock can force liquidation. - Short squeezes. When many traders are short the same stock, a sharp rally can trigger forced buybacks that drive the price even higher. GameStop in 2021 is the famous example. - Borrow costs. You pay interest on borrowed shares. For heavily-shorted stocks, borrow rates can exceed 50% annually.
For retail traders, shorting is generally inadvisable unless you have a clear thesis and disciplined risk management. The asymmetric loss profile combined with structural bull-market bias makes it a difficult game.
Related terms
- Long Position — Owning an asset with the expectation that its price will rise.
- Leverage — Borrowed capital used to increase trade size beyond what cash alone allows.
- Margin — Borrowed money used to amplify trading positions beyond cash balance.