Shorting a stock, also known as short selling, is an investment strategy where an investor borrows shares of a stock they believe will decrease in value, sells those borrowed shares on the open market, and later aims to buy them back at a lower price to return to the lender. The goal is to profit from the difference between the higher selling price and the lower repurchase price
. Here is how shorting a stock typically works:
- The investor opens a margin account with a broker, which allows borrowing shares and requires collateral or margin to cover potential losses
- The investor identifies a stock expected to decline in price based on research or market analysis
- The broker locates shares available to borrow, often from other clients or institutional lenders
- The investor sells the borrowed shares immediately at the current market price
- If the stock price falls, the investor buys back the shares at the lower price, returns them to the broker, and keeps the profit minus any fees or interest paid for borrowing
- If the stock price rises instead, the investor faces potentially unlimited losses because they must buy back the shares at a higher price to close the position
Short selling is essentially "selling high and buying low," the opposite of the traditional "buy low, sell high" approach. It is used both for speculation-betting on a price decline-and as a hedge to protect other investments from downside risk
. Because short selling involves borrowing shares and margin, it carries significant risks including interest costs on borrowed shares, margin calls, and the possibility of unlimited losses if the stock price rises sharply
