Short Selling

Borrowing and selling a stock you don't own, betting the price will fall.

What Is Short Selling?

Short selling is the practice of borrowing shares from a broker, selling them at the current price, and hoping to buy them back later at a lower price. The difference is your profit. It's essentially a bet that a stock's price will decline.

How It Works Step by Step

1. Borrow 100 shares from your broker.
2. Sell them immediately at $50 each ($5,000 received).
3. Wait for the stock to drop.
4. Buy back 100 shares at $40 each ($4,000 spent).
5. Return the shares to the broker. Your profit: $1,000.

The Risks

Short selling has unlimited risk. When you buy a stock, the most you can lose is 100% (it goes to zero). When you short, the stock can theoretically rise infinitely, meaning your losses are unlimited. This asymmetry makes short selling one of the riskiest strategies in investing.

Short Selling and Earnings

Shorts often build positions before earnings if they believe a company will miss. A strong beat can trigger a short squeeze — shorts rushing to buy back shares, pushing the stock even higher. This is why heavily shorted stocks often have the most dramatic post-earnings reactions.