What is short selling? Short selling is a way to profit when a stock's price falls, by borrowing shares you don't own, selling them at today's price, and aiming to buy them back later at a lower price to return to the lender — pocketing the difference. It flips the usual "buy low, sell high" order into "sell high, buy low," but the mechanics and the risk profile are meaningfully different from simply owning a stock.
You borrow 100 shares of a stock trading at $60 and sell them immediately, receiving $6,000. If the price later falls to $40, you buy 100 shares back for $4,000 to return to the lender, keeping the $2,000 difference (before borrowing fees and interest).
Why the risk is considered unlimited
When you buy a stock outright, the worst case is losing your full investment — a share price cannot fall below zero. Short selling flips that asymmetry: you've sold shares you're obligated to buy back eventually, and there's no ceiling on how high a stock's price can climb. A short position that moves against you can, in principle, keep losing money indefinitely, which is why short selling carries meaningfully higher risk than simply owning a stock, even though the mechanics can look similar in reverse.
Margin and borrowing costs
Short selling requires a margin account, since you're borrowing shares from your broker and the broker needs collateral in case the trade moves against you. You'll also typically pay a borrowing fee for the shares, which varies based on how hard those particular shares are to borrow — heavily shorted, low-float stocks can carry high borrowing costs that eat into any profit even if the price does fall.
Short squeezes
A short squeeze occurs when a heavily shorted stock's price rises instead of falling, forcing short sellers to buy shares to close their positions and cap their losses. That forced buying adds more demand, pushing the price higher still — which can trigger more short sellers to cover, compounding the move in a feedback loop that can be sharp and fast.
Shorting vs. buying a put option
Both let an investor profit from a falling stock, but the risk profile differs sharply. A short position carries the unlimited-loss risk described above and requires a margin account. Buying a put option instead caps the maximum loss at the premium paid for the contract, with no margin account required — the tradeoff is that the option has an expiration date, and if the stock doesn't fall enough before then, the contract can expire worthless.
Common mistakes
1. Underestimating how a short position can go
Treating a short like a mirror image of a long position ignores the asymmetry — a losing long position caps out at -100%, a losing short position does not.
2. Ignoring borrowing costs
Hard-to-borrow stocks can carry significant ongoing fees that erode returns even when the price direction is correct.
3. Shorting a heavily shorted stock without accounting for squeeze risk
A stock with an unusually high percentage of its float already sold short is more prone to violent, rapid upward moves if sentiment shifts and short sellers rush to cover at the same time.