Short selling
Also known as: shorting, selling short, short sale
Short selling is selling borrowed shares in the hope of buying them back later at a lower price. It is a bearish strategy that profits when a security's price falls and loses when the price rises.
Short selling means selling a security you do not own. The short seller borrows shares — arranged through their broker — sells them at the current market price, and aims to buy them back later at a lower price to return to the lender. The profit is the difference between the sale price and the repurchase price, minus borrowing costs.
For example, an investor who shorts 100 shares at $50 collects $5,000. If the stock falls to $40, they can buy the shares back for $4,000, return them, and keep the $1,000 difference. But if the stock rises to $65 instead, covering costs $6,500 and the investor loses $1,500.
Short selling carries a risk profile opposite to buying stock. A long position can lose at most what was invested, while a short position has unlimited loss potential — there is no ceiling on how high a stock can climb. Because of the borrowed shares and open-ended risk, short sales must be executed in a margin account, and the seller must post margin and pay any dividends owed on the borrowed shares to the lender.
Short selling is tested across the Series 7, Series 65, and Series 66 exams. Know that it is a bearish strategy with unlimited risk, that it requires a margin account, and how it connects to related topics like technical analysis (short interest) and hedging a short position with options.
Key takeaways
- Short selling is selling borrowed shares now to buy them back later at a hoped-for lower price.
- It is a bearish strategy: profits are capped (the stock can only fall to zero) but losses are unlimited.
- Short sales must occur in a margin account, and the short seller owes any dividends to the share lender.
- Securities exams test the mechanics, risk profile, and margin requirements of short positions.