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Short Selling

Short selling is a way to profit from a falling price: you borrow shares, sell them now, and aim to buy them back cheaper later — but the risk is uniquely large.

In one line: Short selling is a way to profit from a falling price: you borrow shares, sell them now, and aim to buy them back cheaper later — but the risk is uniquely large.

What it is

Short selling flips the usual order of a trade. Instead of buy-low-then-sell-high, a short seller sells first — borrowing shares from a broker and selling them at today's price — then hopes to buy them back later at a lower price, returning the borrowed shares and keeping the difference. It's how traders profit when they expect a stock to fall.

How it works

The lifecycle of a short:

  • Borrow & sell: your broker lends you shares, which you sell at the current price.
  • Buy to cover: later you buy the same number of shares back to return them.
  • Profit or loss: you keep the difference if price fell; you eat the difference if it rose.
The risk is asymmetric. A stock you own can only fall to zero (loss capped at 100%). A stock you've shorted can rise indefinitely — so a short's loss is theoretically unlimited. This is why stops and sizing are non-negotiable for shorts.

Worked example

Example

You believe a large-cap trading at $100 is overextended. You borrow and sell 100 shares, collecting $10,000. If price falls to $80, you buy back 100 shares for $8,000, return them, and keep the $2,000 difference (before borrowing costs). But if the stock instead rises to $130 on unexpected good news, buying back costs $13,000 — a $3,000 loss, and it could get worse if you don't cover. A stop to buy back at a set level is what caps that open-ended risk.

Why it matters

Short selling is what lets markets express negative views and, in aggregate, helps price in bad news. But it's genuinely advanced: the unlimited-loss profile, borrowing costs, and the danger of a short squeeze — where a rising price forces shorts to buy back, driving price even higher in a feedback loop — make it unforgiving. Most beginners are better served mastering the long side and risk management first.

Entry Point Trading's education covers both directions so you understand the mechanics — but every call is framed with defined risk, graded in the open, and we make no return claims.

Keep learning

Related concepts

Momentum Investing
Buying strength, on the tendency of trends to persist.
Stop-Loss
A pre-planned exit that caps the loss on a trade.
Position Sizing
Deciding how much to risk on a single trade.
Volatility and the VIX
Measuring fear and expected market swings.
Risk-Reward Ratio
Sizing the potential gain against the potential loss before you enter.
Stock Signal
A structured buy/sell/hold call — and what a good one must include.

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Common questions

FAQ

Why is short selling considered risky?
Because the potential loss is theoretically unlimited. When you buy a stock, the most you can lose is what you paid (it can only fall to zero). When you short, the stock can rise without limit, and your loss grows with it. Add borrowing costs and short-squeeze risk, and shorting demands strict risk management.
What is a short squeeze?
A short squeeze happens when a heavily-shorted stock starts rising, forcing short sellers to buy shares to cover their positions and cap losses. That buying pushes the price up further, forcing more shorts to cover — a self-reinforcing spike. It's one of the biggest dangers of shorting a crowded stock.

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