Definition
Short selling is selling an asset you have borrowed in the hope of buying it back later at a lower price. The short seller profits if the price falls and loses if it rises.
How it works
In the stock market, a broker lends shares to the short seller, who sells them at the current price. Later the short seller buys the same number of shares back and returns them to the lender. Profit or loss = (sale price − buy-back price) × quantity − costs. Costs include a borrowing fee, which can be high for shares that are hard to borrow, and any dividends paid while the position is open, which the short seller must pay to the lender.
The risk profile is the reverse of buying. The maximum gain is limited, because the price cannot fall below zero, but the possible loss is in theory unlimited, because the price can keep rising. A short squeeze happens when a rising price forces many short sellers to buy back at once, which pushes the price higher still. Brokers can also demand more margin or recall borrowed shares.
In crypto, short positions are usually opened with perpetual futures or margin trading rather than by borrowing coins directly, so funding payments, leverage and liquidation also affect the result. Rules on short selling differ by country and market, and regulators sometimes restrict it during periods of market stress.
Example (hypothetical numbers)
Suppose you borrow 100 shares of Company X and sell them at $50, receiving $5,000.
If the price falls to $40, buying back costs $4,000: ($50 − $40) × 100 = $1,000, minus a $15 borrowing fee, leaves $985 of profit.
If the price rises to $65 instead, buying back costs $6,500: ($50 − $65) × 100 = −$1,500, plus the fee.
The most this trade could ever gain is $5,000 (if the price fell to $0), but the loss has no fixed limit.
Common mistakes
- Treating the possible loss on a short as limited to the amount received from the sale.
- Forgetting borrowing fees and the dividends a short seller must pay while the position is open.
- Opening a short without a plan for a sudden squeeze or a margin call.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.