Glossary
Short selling
Selling borrowed shares in the hope of buying them back later at a lower price, with the profit, the borrow costs and the theoretically unlimited risk explained.
On this page
Short selling is selling shares you do not own, borrowed through your broker, with the plan of buying them back later. If the price falls, you repurchase cheaper, return the shares and keep the difference. It lets investors profit from a decline or hedge other holdings, and it adds sellers who help keep prices honest, but it reverses the usual risk profile of owning a stock.
How it works
Shorting requires a margin account. Under Regulation SHO, before accepting a short sale the broker must have borrowed the shares or have reasonable grounds to believe they can be borrowed in time for settlement (the "locate"). The proceeds stay in the account as collateral, and the short seller owes the lender any dividends paid while the position is open, plus a borrow fee that can be tiny for liquid stocks or very high for scarce ones.
The risks that stand out
A long position can lose at most what you paid. A short position has no ceiling, because a price can keep rising. Brokers can issue margin calls as the stock climbs, recall the loan and force you to cover at a bad moment, and a crowded short can turn into a squeeze. The Rule 201 short-sale restriction can also limit new shorts after a stock falls 10% or more in a day.