Short Selling

Intermediate

Short selling is selling a security you do not own, by borrowing it, in the hope of buying it back later at a lower price and keeping the difference as profit.

Normal investing means buying low and selling high. Short selling reverses the order: sell high first, then buy low later. The investor borrows shares, usually through their broker, sells them in the market and later buys the same number of shares to return to the lender.

For example, an investor borrows and sells 100 shares at 50, receiving 5,000. If the price falls to 40, they buy 100 shares for 4,000 and return them, making a profit of 1,000 before fees and borrowing costs.

Short selling is risky. If the price rises instead, the investor loses money. Because there is no limit to how high a price can rise, losses are potentially unlimited. If the price in the example rose to 80, buying back the shares would cost 8,000, a loss of 3,000.

Short sellers pay fees to borrow shares and must cover any dividends paid while they hold the position. They can also be forced to buy back if the lender recalls the shares. Short selling is used for speculation and for hedging, and some argue it helps markets by exposing overvalued companies.

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