What Is Short Selling?
Short selling is a bet that a stock price will fall. You borrow shares, sell them now, and hope to buy them back later at a lower price.
How shorting a stock works
- You borrow one share from your broker and sell it for $100.
- Later the price falls to $70.
- You buy one share for $70 and give it back.
- You keep the $30 difference, minus fees and interest.
Why short selling is risky
When you buy a stock, the most you can lose is what you paid. When you short, there is no limit. If the price goes from $100 to $300, you still have to buy the share back. You lose $200 on a $100 bet.
What is a short squeeze?
When many people short a stock and the price starts rising, they rush to buy shares back to limit their losses. That buying pushes the price even higher. In 2021, GameStop's price jumped many times over in a famous short squeeze.
Why short sellers exist
Short sellers sometimes dig up problems others missed, like weak profit or too much debt. That can help prices stay honest. Shorting is mainly for experienced traders, not for beginners.
See it in real companies
Open a company to see what it sells and how it makes money.