Glossary term
Short Selling
Short selling is selling borrowed shares or securities with the goal of buying them back later, usually at a lower price.
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What Is Short Selling?
Short selling is selling borrowed shares or securities with the goal of buying them back later, usually at a lower price. A short seller borrows the security, sells it in the market, and later covers the position by buying it back and returning it to the lender.
If the price falls, the short seller may profit before borrowing costs, fees, dividends, taxes, and other expenses. If the price rises, the short seller can lose money, and the potential loss can be very large.
Key Takeaways
- Short selling is a way to profit from a price decline or hedge exposure.
- The short seller borrows and sells shares, then later buys them back to close the position.
- Short-sale losses can be large because the price can rise far above the sale price.
- Short sellers may face borrowing costs, margin calls, recalls, and forced covering.
- Heavy short selling can contribute to market pressure, while heavy covering can contribute to a short squeeze.
How Short Selling Works
In a simple short sale, an investor borrows shares from a broker, sells them, and receives cash proceeds. At some later point, the investor buys shares in the market to return to the lender. That closing buyback is called short covering.
The trade works only if the total cost to buy back and maintain the position is lower than the sale proceeds. Borrow fees, dividends owed to the share lender, commissions, and margin requirements can all affect the result.
Long Position Versus Short Position
Position | Profit goal | Main risk |
|---|---|---|
Long position | Profit if the price rises | Price falls toward zero |
Short position | Profit if the price falls | Price rises sharply |
Why Investors Short Sell
Some investors short sell because they believe a stock is overvalued, a company has weak fundamentals, or a price decline is likely. Others use short selling to hedge another position, manage portfolio exposure, or express a relative-value view.
Short selling can also help markets by adding skepticism and liquidity. But abusive short-selling practices and manipulation are illegal, and short selling remains risky even when the thesis is thoughtful.
The Bottom Line
Short selling is selling borrowed securities in hopes of buying them back later at a lower price. It can be useful for hedging or expressing a bearish view, but it carries borrowing costs, margin risk, and potentially large losses.