Short Selling

Short selling is a trading strategy where an investor sells shares they do not own, borrowing them from a broker with the expectation that the price will fall.

How It Works

The trader contacts a broker to borrow a specific number of shares.

The borrowed shares are sold immediately at the current market price.

If the share price declines, the trader buys back the same number of shares at the lower price.

The repurchased shares are returned to the broker, and the difference between the sale price and the repurchase price (minus fees and interest) constitutes profit.

If the price rises instead, the trader must buy back at a higher cost, resulting in a loss that can theoretically be unlimited.

Why It Matters

Short selling adds liquidity to markets by providing additional sellers.

It helps price discovery, allowing overvalued securities to adjust more quickly.

Investors use short positions to hedge long‑only portfolios against market downturns.

Example: A trader believes company ABC’s stock is overpriced at $50 per share. They borrow 1,000 shares, sell them for $50,000, and later buy them back at $40 per share for $40,000. After returning the shares, the trader profits $10,000 (less borrowing costs).