Short Selling
Borrowing shares and selling them, hoping to buy them back cheaper later. Profit = sell price minus buy-back price.
Short selling is the practice of borrowing shares from a broker, selling them in the open market, and later buying them back (covering) to return to the lender. The profit comes from price decline; the loss comes from price increases — and losses are theoretically unlimited because a stock can rise infinitely.
To short a stock, your broker must be able to locate shares to borrow. You pay a borrow rate (which can be very high for heavily shorted or hard-to-borrow stocks). The SEC's Regulation SHO governs short selling rules, including the locate requirement.
Short selling provides market efficiency by allowing negative views to be expressed in prices. Shorts are also used to hedge long portfolios and by market makers to facilitate customer buying without taking directional risk.
Example
You borrow 100 shares at $50 and sell them for $5,000. The stock drops to $35. You buy back 100 shares for $3,500 and return them to the lender. Profit: $5,000 − $3,500 − borrow fees = roughly $1,450. If the stock rises to $80 instead, your loss is $3,000+.
Related Terms
Days to Cover
Short interest divided by average daily volume. Estimates how many trading days it would take all short sellers to buy back their shares.
IntermediateFloat
The number of shares freely available for public trading, excluding insider-held and restricted shares.
IntermediateShares Outstanding
The total number of a company's shares currently held by all shareholders, including insiders and institutions.
BeginnerShort Interest
The total number of shares currently sold short and not yet covered. Reported bi-weekly; high short interest can signal a crowded bet or squeeze risk.
IntermediateShort Squeeze
A rapid price surge that forces short sellers to cover at a loss, which drives the price even higher in a self-reinforcing feedback loop.
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