Short Selling Explained: How Shorting Works

Short selling means selling something you don’t own, hoping to buy it back later at a lower price. You profit if the price falls and lose if it rises.

How shorting a stock works

Your broker lends you shares (from its own inventory or other clients’ holdings).
You sell them at today’s price, say 100 shares at $50 = $5,000.
Later you buy back 100 shares to return them. If the price is $40, that costs $4,000.
Your profit is the difference: $1,000, minus costs. If the price rose to $60 instead, you’d lose $1,000.

Costs of shorting

Borrow fee: interest for borrowing the shares. Usually small, but very high for stocks that are hard to borrow.
Dividends: if the stock pays a dividend while you’re short, you owe it to the lender.
Margin: shorting needs a margin account, and your broker can require more collateral if the price rises.

The risks

Losses are unlimited in theory. When you buy a stock, the most you can lose is what you paid. When you short, the price can keep rising with no ceiling. A short squeeze happens when a rising price forces short sellers to buy back to limit losses, and that buying pushes the price even higher. Your broker can also recall borrowed shares, forcing you to close.

In the US, the SEC’s alternative uptick rule (Rule 201) restricts short selling in a stock for the rest of the day and the next day after it falls 10% or more from the previous close: shorts can then only be placed above the current best bid.

Shorting forex, futures, CFDs and crypto

In forex you’re always buying one currency and selling another, so “going short” EUR/USD just means selling it, with no borrowing step. Futures and CFDs can also be sold as easily as bought. Crypto can be shorted with perpetual futures or margin trading.

Calculate a short trade with the stock profit calculator (choose “Short sell”), and size it with the position size calculator.

Educational explanation only. ChartWatch is independent and doesn’t give trading or investment advice. Trading carries a risk of loss.

FAQ

How does short selling work?

You borrow shares from your broker, sell them, and later buy them back to return them. If the price fell in between, you keep the difference as profit.

How much can you lose short selling?

In theory there's no limit, because a price can keep rising. That's why short sellers usually use stop losses and watch margin closely.

What is a short squeeze?

A rapid price rise that forces short sellers to buy back their positions, and that buying pushes the price even higher.

Do I pay dividends if I short a stock?

Yes. If the stock pays a dividend while you're short, you owe that amount to the lender of the shares.

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