What is Short Selling?
Lesson 1 of 66 min5 exercises
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Betting Against a Stock
Short selling is borrowing shares to sell immediately, hoping to buy them back later at a lower price. The difference is your profit. It's literally betting that a stock will go down.
How Short Selling Works
1. Borrow 100 shares from broker at $50
2. Sell them immediately for $5,000
3. Wait for price to drop
4. Buy back 100 shares at $40 for $4,000
5. Return shares to broker
6. Keep $1,000 profit
But if price rises to $60, you'd lose $1,000 buying back!
2. Sell them immediately for $5,000
3. Wait for price to drop
4. Buy back 100 shares at $40 for $4,000
5. Return shares to broker
6. Keep $1,000 profit
But if price rises to $60, you'd lose $1,000 buying back!
Watch out
Short selling has unlimited risk. A stock can only go to $0 (100% gain for shorts) but can go up infinitely (unlimited loss).
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Why Shorts Matter to You
Even if you never short sell, understanding short interest helps you:
- Identify potential short squeezes
- Understand unusual price movements
- Spot stocks with bearish sentiment
- Find contrarian opportunities
- Identify potential short squeezes
- Understand unusual price movements
- Spot stocks with bearish sentiment
- Find contrarian opportunities
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Key takeaways
- Short selling = borrowing shares to sell high, buy back low
- Shorts profit when stocks fall, lose when stocks rise
- Unlimited risk for short sellers
- High short interest can lead to squeezes
Next: 5 quick exercises. Miss one and it comes back at the end.