Short Selling

Short selling borrows shares to sell now, hoping to buy them back cheaper and pocket the difference.

In the real market

A hedge fund builds a large short position in a struggling retailer, believing the stock is overvalued. A surprise takeover bid sends the price up 80% in days, and the fund faces margin calls it cannot meet. It is forced to buy back shares at ever-higher prices, adding fuel to the squeeze, and the fund loses billions. The famous meme-stock squeezes of 2021 worked exactly this way. Short selling can be right about a business and still be destroyed by the market’s timing.

Using it in practice

Shorting is an advanced, high-risk trade for experienced investors. If you want downside protection, buying puts caps your loss at the premium; a short position has no such cap.

Where people go wrong

Losses are theoretically unlimited if the price rises instead of falling — the opposite of owning.

Why investors care

It is the main way to profit from a falling price.

Example in numbers

Key takeaway

Short selling profits from falling prices but carries theoretically unlimited risk, because a stock can rise forever while your loss grows with it. You borrow shares, sell them, and hope to buy back cheaper — and a squeeze can force you to cover at catastrophic prices. Shorting is an advanced trade for experienced investors, and a put option is almost always a safer way to express a bearish view because your loss is capped at the premium. Being right about a business is not the same as surviving the market’s timing.

Definitions reviewed by the Investing Glossary editorial team.