Learn the stock market › Short selling, warrants and leverage › Lesson 1 of 7
What is short selling and how does it work?
How it works
- You borrow shares. Your broker arranges the loan, and you pay a borrow fee for as long as you have them.
- You sell the borrowed shares at today's price and receive the money.
- Later you buy the same number of shares and return them. If the company pays a dividend while you have the loan, you pay it to the lender.
The result is the sale less the buy-back, the borrow fee and any dividend. A short sale runs in a margin account, so the broker's margin rules apply and it can ask for more money if the price rises.
Work it out
The example sells 100 shares at $200 and buys them back at $150 after 90 days. Change the numbers and see what happens if the price rises instead.
You sell for $20,000 and buy back for $15,000. The loan costs $49 and the dividend $0. Result: +$4,951, +25% of what you sold for.
If the money in the account is no longer enough, the broker can close the position, often when the loss is already large.
The gain has a ceiling, the loss has none
A stock can at most fall to zero, so the most a short seller can make is what they sold for. Upward there is no limit. Tesla since Jun 29, 2010, the largest rise and the largest fall over twelve months:
| Tesla | Twelve months | Price | Short seller's result, $10,000 sold |
|---|---|---|---|
| Largest rise | Aug 30, 2019 – Aug 31, 2020 | +1004% | −$100,438 |
| Largest fall | Jan 3, 2022 – Jan 4, 2023 | −72% | +$7,158 |
Someone who sold Tesla short for $10,000 on Aug 30, 2019 and bought it back on Aug 31, 2020 lost $100,438, as the price rose 1004%. That is more than the whole sale. The largest fall, −72%, would have made $7,158. The prices include dividends, because a short seller pays them.
Why sell short?
Someone who expects a price to fall can sell short to profit from it. Others sell short to protect themselves: an owner of shares in one industry can sell another stock in the same industry short and worry less about the whole industry falling. Market makers also sell short to meet buyers they did not expect. What happens when many short sellers want to buy back at once is in the lesson on the short squeeze.
Test yourself
You sell a stock short for $10,000 and the price triples. How much have you lost?
How the stock has moved: Why did Tesla move?
Sources
- US Securities and Exchange Commission, Stock Purchases and Sales: Long and Short, read on November 6, 2026: a short sale is normally settled with borrowed stock, short sellers are subject to the margin rules and pay interest on the loan, and pay any dividend to the lender.