TL;DR
- Short selling, or “shorting,” means an investor expects a stock to lose value
- In a short sell, investors borrow stocks and immediately sell in hopes of making a profit
- Shorting is incredibly risky for investors, as a stock could trend infinitely upward in theory
What stocks should I short sell?
Who Are Typical Short Sellers?
- Hedge Funds. Hedge funds are one of the most active entities involved in shorting activity. ...
- Hedgers. Not to be confused with hedge funds, hedging involves taking an offsetting position in a security similar to another in order to limit the risk exposure in the initial ...
- Individuals. ...
How do you sell a stock short?
Traders make money from short selling if the price of the stock falls and they lose if it rises. Short interest is important to track because it can act as an indicator of market sentiment towards a particular stock. An increase in short interest can ...
What is meant by shorting a stock?
What Is Shorting a Stock Example?
- Here’s an example of shorting a stock:
- $AAPL (Apple) is at $300 resistance level
- You take short position on Apple of $100 shares. 100 x $300 = – $30,000)
- Apple falls to $290 and then you cover your position
- Your Profit = $1,000 ($300-$290 = $10. $10 x 100 shares = $1,000)
When do you short sell a stock?
Gillies: You didn't see this ... There are reasons to look at short interest. But if your reason is, "Oh, these guys. Smart people short the stock, I should also short the stock." Just like that coat-tailing. Don't do that. Discounted offers are only ...
What is short selling example?
Example of Short Selling for a Profit Imagine a trader who believes that XYZ stock—currently trading at $50—will decline in price in the next three months. They borrow 100 shares and sell them to another investor. The trader is now “short” 100 shares since they sold something that they did not own but had borrowed.
How do you tell if a stock is being shorted?
For general shorting information about a company's stock, you can usually go to any website with a stock quote service. For more specific short interest info, you would have to go to the stock exchange where the company is listed.
What happens if you short a stock and it goes up?
If the stock that you sell short rises in price, the brokerage firm can implement a "margin call," which is a requirement for additional capital to maintain the required minimum investment. If you can't provide additional capital, the broker can close out the position, and you will incur a loss.
What is the most shorted stock right now?
Most Shorted StocksSymbol SymbolCompany NameFloat Shorted (%)RDBX RDBXRedbox Entertainment Inc.46.23%PMVP PMVPPMV Pharmaceuticals Inc.42.64%FUV FUVArcimoto Inc.42.04%CONN CONNConn's Inc.41.78%42 more rows
What are the most heavily shorted stocks?
Citi Trends, Inc. Beyond Meat, Inc. Heron Therapeutics, Inc.
Why is short selling so risky?
Market risk is one of the biggest risks of short selling. Because there is no limit on how high a stock can go, the market risk you face as a short seller is potentially unlimited. The higher the stock price goes, the more pain you feel.
Can I short on Robinhood?
Shorting stocks on Robinhood is not possible at present, even with a Robinhood Gold membership, the premium subscriptions which allows Robinhood investors to use margin for leveraging returns. Instead, you must either use inverse ETFs or put options.
What are the disadvantages of short selling?
Short squeezes, where rapid and significant upward price moves cause short sellers to cover in mass, can push prices against short sellers. Borrowing stock can be difficult in less liquid names or if the amount of available stock in the market is limited.
A Beginner's Guide for How to Short Stocks
Joshua Kennon is an expert on investing, assets and markets, and retirement planning. He is the managing director and co-founder of Kennon-Green & Co., an asset management firm.
Why Sell Short?
Usually, you would short stock because you believe a stock's price is headed downward. The idea is that if you sell the stock today, you'll be able to buy it back at a lower price in the near future.
How Shorting Stock Works
Usually, when you short stock, you are trading shares that you do not own.
What Are the Risks of Short Selling?
When you short a stock, you expose yourself to a large financial risk.
How Is Short Selling Different From Regular Investing?
Shorting a stock has its own set of rules, which are different from regular stock investing, including a rule designed to restrict short selling from further driving down the price of a stock that has dropped more than 10% in one day, compared to the previous day's closing price. 4
Frequently Asked Questions (FAQs)
In theory, you can short a stock as long as you want. In practice, shorting a stock involves borrowing stocks from your broker, and your broker will likely charge fees until you settle your debt. Therefore, you can short a stock as long as you can afford the costs of borrowing.
Summary
Short selling is a strategy designed to profit from the price of market-traded security going down, rather than up.
How Does it Work?
Many people are at least initially confused by the concept of selling short because it involves selling something you don’t own. Conversations with one trader attempting to explain selling short to another often go something like the following:
Example – How a Short Trade Plays Out
When you enter an order to sell short, you are requesting to borrow the necessary stock shares to sell and placing an order to sell the borrowed shares per the order instructions – e.g., at a certain price.
Main Points
Selling short is simply the opposite of buying “long.” It’s just another stock trade – the only truly significant difference is which direction you expect the stock price to move in.
High Potential Risk
There is one difference between buying long and selling short that makes short selling a much riskier practice – the level of risk that is inherently involved when selling short.
Advantages
The first advantage is leverage. Since you can sell short with margin trading, only putting up a percentage of the total value of the stock you’re trading, you can make more money with a smaller investment.
Disadvantages
Historically, over time, stock prices tend to move higher – short trading is always trading contrary to the overall trend of the stock market as a whole.
What Does it Mean to Short a Stock?
When an investor goes long on a stock, she buys it with the belief that it is going to increase in value over time. Going short, on the other hand, is what some investors do when they believe the stock is about to decrease and think they can take advantage of that. In short selling a stock, the investor doesn't actually own it.
Why Do People Short-Sell Stocks?
Why do some investors decide to do this? It's clearly a high-risk situation for them, and even more out of their control than a usual investment. Is it worth it?
Risks of Short-Selling
There are rewards in short-selling if you get it right. But investors don't always get it right -- and enough of them trying to can have major consequences for an economy.
Notable Examples of Short-Selling
Some economists put part of the blame for the 2008 stock market crash and Great Recession on all the investors short-selling companies like Fannie Mae and Freddie Mac after the housing market collapsed.
What is short selling?
Short selling is when a trader borrows shares from a broker and immediately sells them with the expectation that the stock price will fall shortly after. If it does, the trader can buy the shares back at the lower price, return them to the brokerage and keep the difference as profit.
Why short a stock?
Investors may use a shorting strategy as a form of speculation. In other words, it’s a high-risk maneuver that could possibly yield high returns in exchange for taking on exceptional risk.
How to short a stock
First you’ll need a margin account. Borrowing shares from the brokerage is effectively a margin loan, and you’ll pay interest on the outstanding debt. The process for obtaining a margin account varies by brokerage, but you’ll probably need to be approved for it.
But what if the stock price rises?
In a traditional stock purchase, the most you can lose is the amount you paid for the shares, but the upside potential is theoretically limitless.
Short-selling controversy
Short-sellers receive all kinds of criticism. They've been accused of hurting businesses, manipulating public opinion and spreading rumors about a company or stock. It's even been implied that short-sellers are almost unpatriotic for not supporting publicly traded companies.
This method of betting against the stock market can be lucrative but has big risks
Matt is a Certified Financial Planner based in South Carolina who has been writing for The Motley Fool since 2012. Matt specializes in writing about bank stocks, REITs, and personal finance, but he loves any investment at the right price. Follow him on Twitter to keep up with his latest work! Follow @TMFMathGuy
When short-selling makes sense
At first glance, you might think that short-selling would be just as common as owning stock. However, relatively few investors use the short-selling strategy.
The risks of short-selling
Short-selling can be profitable when you make the right call, but it carries greater risks than what ordinary stock investors experience.
Alternative to shorting
As a final thought, an alternative to shorting that limits your downside exposure is to buy a put option on a stock. Essentially, a put option gives you the right, but not the obligation, to sell a stock at a predetermined price (known as the strike price) at any time before the option contract expires.
What is shorting?
Short selling is the act of borrowing something you don’t own, selling it, then buying the stock back later date and returning it back to the lender. Short sellers bet that the stock they sell will fall in price so they can buy at a lower price and collect the difference as their profit.
Why sell short?
Selling short takes place when a trader believes the value of the stock will fall and decrease.
How does short selling for a profit work?
To illustrate with an example, let’s say I borrow 10,000 shares of Vodafone plc stock at a stock price of 200p each, and sell them in the market. Once sold, I have a short position in Vodafone with exposure of £20,000. This means that I now have an obligation to buy 10,000 shares of Vodafone stock back in the future, in order to close my position.
What are the risks of short selling?
Many people believe that because you are selling something that you don’t own that your risk is infinite.
What are the costs of short selling?
In addition to these losses though, the stock we borrow to trade doesn’t come free. Brokers take a risk lending stock, so will charge a commission, or a fee on their shares until the short position is closed out and their stock is returned.
UK short selling regulations
The Financial Conduct Authority (FCA) here in the UK is aware of the importance of short selling within effectively functioning markets.
What is shorting in summary?
To summarise, short selling is the borrowing of stock to sell on the open market with a view to buying back at a later date, at a profit.
How Short Selling Works
Put simply, short selling, or shorting a stock, is a risky investment strategy in which an investor gambles that the price of a stock will decrease in the near future. Under the terms of a short selling agreement, a borrower elects to borrow a stock or another security from a lending party for a fixed period of time.
Why Investors Sell Short
Investors short stocks in hopes that the price of the stock will decline, and that by betting against the value of a stock increasing, they can turn a tidy profit. It’s a quick way to earn income by trading equities and creates a potential opportunity to benefit from the stock market, even when market prices are falling.
The Risks Of Short Selling
Risks of short selling a stock are considerable, noting that there’s no telling if, when, or how much a stock price may rise or fall despite predictions, which can lead to costly mistakes.
Final Thoughts On Shorting A Stock
Short selling can be profitable for some investors but comes with high risks attached. Simply investing in the right stocks can often prove a more stable and lucrative endeavor. To learn more about investment basics, and ways to maximize your odds of earning passive income, be sure to visit the personal finance section at our Learning Center.
How Does It Work?
- Many people are at least initially confused by the concept of selling short because it involves selling something you don’t own. Conversations with one trader attempting to explain selling short to another often go something like the following: “It’s just like a regular stock trade, except you sell it first, then buy it to close out your short position. Okay, so you think GE stock is going to go do…
Example – How A Short Trade Plays Out
- When you enter an order to sell short, you are requesting to borrow the necessary stock shares to sell and placing an order to sell the borrowed shares per the order instructions – e.g., at a certain price. For example, you just sold 100 shares of Company Z at the current market priceof $90 per share. Just like any other time when you sell stock, the money from the sale – in this case, $9,00…
Main Points
- Selling short is simply the opposite of buying “long.” It’s just another stock trade – the only truly significant difference is which direction you expect the stock price to move in. If you expect the stock to go up, then you buy long, hoping to profit from a price increase. Conversely, if you expect the stock to go down, then you sell short, hopin...
High Potential Risk
- There is one difference between buying long and selling short that makes short selling a much riskier practice – the level of risk that is inherently involved when selling short. When you buy a stock, your total maximum risk is limited to its price. If Z stock is selling for $90 a share, you cannot lose any more than $90 a share on your investment – the absolute worst-case scenario i…
Advantages
- The first advantage is leverage. Since you can sell short with margin trading, only putting up a percentage of the total value of the stock you’re trading, you can make more money with a smaller investment. Also, incorporating short-selling into your investment strategies doubles your profit opportunities, as you can make money not only from stock price increases but also from stock p…
Disadvantages
- Historically, over time, stock prices tend to move higher – short trading is always trading contrary to the overall trend of the stock market as a whole. When it comes to trading costs, in addition to the interest charges on short selling, traders may also need to pay a “hard to borrow” fee when the stock shares in question are, in fact, hard for the broker to acquire for lending purposes.
More Resources
- Thank you for reading CFI’s guide on Short Selling. To keep advancing your career, the additional CFI resources below will be useful: 1. Stock Price 2. Trading Securities 3. The Winning Mindset of a Trader 4. Position Trader
What Does It Mean to Short A Stock?
Why Do People Short-Sell Stocks?
- Why do some investors decide to do this? It's clearly a high-risk situation for them, and even more out of their control than a usual investment. Is it worth it? If they play their cards right, certainly. And what could be more tempting for an experienced investor than the ability to make money off of a company's decline instead of losing money from it? It's not something that would necessaril…
Risks of Short-Selling
- There are rewards in short-selling if you get it right. But investors don't always get it right -- and enough of them trying to can have major consequences for an economy. The pros of shorting a stock are all based on the idea that a short-seller's instinct that a stock is about to tank is a sound, logical one that will come true. Despite your best efforts, however, that isn't something that can …
Notable Examples of Short-Selling
- Some economists put part of the blame for the 2008 stock market crash and Great Recessionon all the investors short-selling companies like Fannie Mae and Freddie Mac after the housing market collapsed. At its worst, too much short-selling may have contributed to major economic problems. In other instances, it can tell you how investors view a company. One recent example …