What Is Short Selling?
Short selling means borrowing shares, selling them, and hoping to buy them back later at a lower price. How it works, why the possible loss has no limit, and the costs involved.
In one sentence
Short selling. Selling borrowed shares in the hope of buying them back later at a lower price. Losses are unlimited if the price keeps rising.
How it works
Instead of buying first and selling later, a short seller borrows shares, sells them now, and hopes to buy them back later at a lower price to return to the lender.1 It's a bet that the price will fall, made in a margin account, with interest or fees paid for the borrowed shares.
| Price when bought back | Result |
|---|---|
| $30 | +$1,000 |
| $40 | $0, minus borrowing costs |
| $60 | −$2,000 |
| $120 | −$8,000 |
The most the short seller can make is $4,000, if the shares go to zero. There's no ceiling on the loss.
Why the loss has no limit
When you buy a stock, the most you can lose is the amount you invested. But there's no limit to how high a price can rise, so there's no limit to the possible loss on a short sale.1 As the price rises, the broker can demand more collateral, and a short seller who can't provide it can be bought out at the worst moment.
Learn it properly
- Margin and Short SellingPart 1: Foundations · Free
Notes and sources
- Investor.gov, U.S. Securities and Exchange Commission. Investor Bulletin: An Introduction to Short Sales. Checked 2026-09-26. Back to text