Short Selling
Short selling is a trading strategy where you bet that a stock (or asset) will go down in price — instead of up.
How It Works (Step by Step)
- Borrow the stock from your broker (you don’t own it).
- Sell it at the current market price.
- Wait for the price to drop.
- Buy it back (cover the short) at the lower price.
- Return the stock to your broker — keep the profit.
Example
- You short sell 100 shares of Stock ABC at $50 = $5,000
- The stock drops to $30, and you buy back the shares = $3,000
- Your profit = $2,000 (minus fees and interest)
Risks of Short Selling
| Risk | Why It Matters |
|---|---|
| Unlimited losses | If the stock goes up instead of down, there's no cap — the stock could go to $1,000. |
| Margin calls | If price rises, your broker may demand more money in your account. |
| Borrow fees | You pay to borrow the stock, especially if it's in high demand. |
| Short squeezes | If many traders short the same stock, rapid buying can force prices up fast (e.g., GameStop 2021). |
When Do People Short Sell?
- When they believe a stock is overvalued
- During a market downturn
- To hedge other positions
How to Short Sell (As a Retail Investor)
You'll need:
- A margin account (not a standard cash account)
- Approval from your broker to trade on margin and short
- A broker that allows short selling (e.g., Interactive Brokers, Questrade, TD Ameritrade)
Alternatives to Short Selling
If you want to profit from a price drop without unlimited risk, consider:
- Put options
- Inverse ETFs (e.g., SH for shorting the S&P 500)
- Bear market funds