What is short selling? How to profit when prices fall

Short selling is a way to bet that a price will fall. Instead of buying first and selling later, you sell first and buy later. Since you do not own the asset, you borrow it from a broker, who usually lends it from another client's holdings.

It is used with stocks, crypto, futures and other instruments. Traders short to speculate on a decline, and investors short to hedge, offsetting losses elsewhere in a portfolio.

You borrow shares, sell them at today's price, and wait. If the price drops, you buy the shares back, return them to the lender and keep the difference. If the price rises, you must still buy them back, at a loss:

Profit = (sale price − buyback price) × shares − fees
Example: sell at 50, buy back at 40, 100 shares → +1,000 before fees
Example: buy back at 70 instead → −2,000 before fees

While the position is open you pay a borrowing fee and any dividends the shares distribute. Brokers also require margin, so a position moving against you can trigger a margin call.

A bought stock can fall only to zero, so the most you can lose is your stake. A short can lose far more, because a price can rise without limit. Losses can exceed the cash you put in.

A short squeeze happens when a heavily shorted asset rises sharply and short sellers rush to buy back to cut losses. Their buying pushes the price even higher. Lenders can also recall shares, forcing you to close at a bad time.

Rules differ by market. Regulators have at times restricted or banned short selling during crises, and not every stock or crypto asset can be borrowed. Check what your broker and local rules allow.

If you only want to protect against a fall, alternatives with capped risk include buying put options or inverse ETFs. They have their own costs, so understand them before using them.