Short Selling Explainer
Short selling is a strategy in which an investor sells a security that has been borrowed, expecting to buy it back later at a lower price. The repurchased shares are returned to the lender, and the price difference contributes to profit or loss after costs.
Broker-dealers must address locate and delivery requirements, and the position is held in a margin account. The short seller pays borrowing costs and generally compensates the lender for dividends or other distributions that occur while the position remains open.
Losses can exceed the original sale proceeds because a stock price can rise without a fixed upper limit. Rising prices can trigger margin demands, forced covering, or a short squeeze as multiple sellers compete to buy scarce shares. A lender can also recall stock.
Short selling can support hedging and price discovery, but abusive practices and manipulation remain prohibited. Investors should evaluate borrow availability, fee changes, corporate actions, liquidity, position size, and the possibility of forced closure before focusing on a bearish thesis.
The seller delivers borrowed shares and later purchases replacements.
Profit requires the repurchase and costs to work favorably.
Borrow fees, margin interest, and dividend payments can accumulate.
Hard-to-borrow securities can become especially expensive.
The price can rise far beyond the sale level.
Margin calls and squeezes can force an untimely exit.
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