TRADING GLOSSARY

Short selling: how to profit when prices fall

Short selling is a trading strategy where you profit from a decline in an asset’s price. Instead of the traditional “buy low, sell high,” you reverse the order: sell high first, then buy back lower. This allows you to make money in falling markets.

How short selling works

When you short sell a stock, your broker lends you shares that you do not own. You immediately sell these borrowed shares at the current market price. Later, you buy the shares back (hopefully at a lower price) and return them to the lender. The difference between your sell price and your buy price is your profit.

Example: You short 100 shares of a stock at $50, receiving $5,000. The stock drops to $40. You buy back 100 shares for $4,000 and return them. Your profit is $1,000 (minus borrowing fees and commissions).

Risks of short selling

Short selling carries unique risks that do not exist with long (buy) trades. Unlimited loss potential: When you buy a stock, the most you can lose is 100% (the stock goes to zero). When you short a stock, there is no ceiling on how high the price can go. A stock you shorted at $50 could theoretically go to $500, $5,000, or higher. Short squeeze risk: If a heavily shorted stock starts rising, short sellers rush to buy back shares to limit their losses, which drives the price even higher, forcing more short sellers to cover. This cascade can cause explosive upward moves (see GameStop 2021).

When to short sell

Short selling is most effective in clear downtrends, after bearish technical breakdowns, when fundamentals are deteriorating, and when sentiment has turned from bullish to bearish. AskTrade’s research reports include bearish scenarios and optimal short entry levels when the analysis warrants it.

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

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AskTrade analyses are AI-generated and do not constitute financial advice.