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Short selling, also called shorting or going short, is an investing strategy that’s gotten a lot of attention in movies and the media. Find out how short selling works—and why it’s risky.
Short selling is a strategy for profiting when the price of a stock declines. A stock (or other security) that you own is referred to as a long position. When you sell a stock (or other security) that you do not own, this is called a short position.
When you sell a stock short, the shares are borrowed by your investment firm from another investor. Because borrowing is involved, you need a margin account and you will have to pay interest in addition to trading commissions.
Short sellers are successful when the stock declines and they can repurchase the shares at the new lower price to return to their original owner. The short seller profits from the difference between the selling price and the cost of repurchasing the stock, minus commissions and interest costs.
Short sellers are unsuccessful when the stock price goes up instead of down. They are still required to repurchase the shares, no matter how high the price. As a result, this is a risky strategy. Potential losses are unlimited.
Example: “Activist short sellers are investors who take large short positions in a stock, then issue reports detailing negative information about the company, hoping to profit when the stock price declines.”
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