Short Selling: 5 Steps for Shorting a Stock - NerdWallet (2024)

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The commonly understood way investors make money off stocks is simple: Buy a stock with the anticipation that its price will rise over time, and if it does, sell it later for a profit. (Not sure how this works? Brush up on how to buy stocks.) This is considered “going long.”

But stocks don’t have to go up for investors to make money off them. Investors also can profit if the stock price falls — and this is the infamous short sell.


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What is short selling?

Short selling a stock is when a trader borrows shares from a broker and immediately sells them with the expectation that the share price will fall shortly after. If it does, the trader can buy the shares back at the lower price, return them to the broker, and keep the difference, minus any loan interest, as profit.

Here’s an example: You borrow 10 shares of a company (or an ETF or REIT), then immediately sell them on the stock market for $10 each, generating $100. If the price drops to $5 per share, you could use your $100 to buy back all 10 shares for only $50, then return the shares to the broker. In the end, you netted $50 on the short (minus any commissions, fees and interest).

That sounds simple enough, but there’s a lot more to short selling stocks than just understanding the concept, and the strategy comes with the risk of serious losses.

How to short a stock in 5 steps

  1. 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.

  2. To make the trade, you’ll need cash or stock equity in that margin account as collateral, equivalent to at least 50% of the short position’s value, according to Federal Reserve requirements. If this is satisfied, you’ll be able to enter a short-sell order in your brokerage account. It’s important to note here that you won’t be able to liquidate the cash you receive from the short sale.

  3. To maintain the short position, the investor must keep enough equity in the account to serve as collateral for the margin loan — at least 25% per exchange rules. However, brokerages may have a higher minimum, depending on the riskiness of the stocks as well as the total value of the investor’s positions.

  4. You can maintain the short position (meaning hold on to the borrowed shares) for as long as you need, whether that’s a few hours or a few weeks. Just remember you’re paying interest on those borrowed shares for as long as you hold them, and you’ll need to maintain the margin requirements throughout the period, too.

  5. If the stock price falls, you’ll close the short position by buying the amount of borrowed shares at the lower price, then return them to the brokerage. Keep in mind that to earn a profit, you’ll need to consider the amount you’ll pay in interest, commission and fees.

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. Where a long-term investor may base their decision on thorough examination of the company’s financials, management and future potential, a speculator may base their decision on analysis of short-term price movements and market signals with the hope of quick profits.

One of those market signals is called short interest — the number of open short positions reported by brokerage firms on a given date. Short interest is often expressed as a percentage or ratio (the number of shares sold short divided by the total number of shares outstanding). High short interest indicates negative sentiment about a stock, which may attract more short sellers.

Shorting a stock also can be used as a hedge. Let’s say you own shares in a company and have doubts about its near-term performance, but don’t want to sell your shares. In this instance, you could continue holding your shares for the long-term while you short the stock, buying back in at a lower price if and when the stock’s value falls. The goal here is to offset the losses of your long position.

21 most-shorted stocks by short interest

Below is a table of the 21 highest-short-interest U.S. stocks on the New York Stock Exchange and the NASDAQ exchanges.



Short Interest (M)


Medical Properties Trust Inc



Plug Power Inc



ChargePoint Holdings Inc



Virgin Galactic Holdings Inc



Luminar Technologies Inc



Arbor Realty Trust Inc.



Desktop Metal Inc



ImmunityBio Inc



Archer Aviation Inc



Microvision Inc.



Eos Energy Enterprises Inc



IonQ Inc



Novavax, Inc.



Enovix Corporation



Sunnova Energy International Inc



Sunpower Corp



PureCycle Technologies Inc



Stem Inc



TG Therapeutics Inc



Kohl's Corp.


AI Inc


Source: Finviz. Stock data is current as of April 30, 2024, and is intended for informational purposes only.

The risks of short selling

The biggest risk of short selling is the potential for unlimited losses.

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. When you short a stock, it’s the opposite — gains are maxed out at the total value of the shorted stock if the stock price falls to $0, but your losses are theoretically limitless, because the stock price can rise indefinitely.

Let’s look at the same example as above. You borrow 10 shares and immediately sell them for $10 each, generating $100. But then the shares rally to $50 each. Remember, you’re on the hook for returning the shares to the broker at some point, meaning you may have to buy them back for $500 — a loss of $400. If the shares rally to $100 each, you’d have to buy them back for $1,000 for a loss of $900. This, in theory, can go on indefinitely, and the longer you wait for the stock price to fall again, the longer you’re paying interest on those borrowed shares.

If this happens, a short seller might receive a “margin call” and have to put up more collateral in the account to maintain the position or be forced to close it by buying back the stock.

Given the market’s long-term upward bias, many investors find it hard to short stocks and achieve consistent, profitable results. What’s more, the risk — especially if you’re not sure what you’re doing — is much higher than a buy-and-hold strategy.

» Learn more about another option in a down market: inverse ETFs

What is a short squeeze?

One of the biggest risks of short selling is a short squeeze, in which a sudden rise in a stock's price scares away a lot of short sellers at once.

Closing a short position means buying the stock in question — so if a group of short sellers gets spooked into closing their positions by a price increase, they will all buy the stock around the same time, which could further increase the price of the stock (and thus any remaining short sellers' losses).

This can create a feedback loop in which short sellers' losses increase exponentially over time.

» Read more about short squeezes.

What is naked short selling, and why is it illegal?

Generally speaking, investors cannot short a stock unless they can borrow the necessary shares, or prove that they can obtain the shares within the clearing time of the short sale (the day of the trade plus two business days).

But there is also naked short selling — the illegal practice of short selling shares that the investor never actually obtained. Naked short sellers collect money by selling unavailable or nonexistent shares. They hope that shares will become available before the end of the clearing window so that they can actually purchase those shares and close out their short before the initial sale is even finalized.

Naked short selling can go very wrong in a number of ways and end up harming the unsuspecting person on the other side of the trade, which is why it’s banned in the U.S. The naked short seller may fail to purchase shares within the clearing window, or they may be forced to close their short trade by a margin call before they get ahold of the shares.

That can cause a failure-to-deliver, in which the person on the other side of the trade essentially gets swindled — they pay money for shares without either receiving those shares or getting their money back.

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Short Selling: 5 Steps for Shorting a Stock - NerdWallet (4)

The bottom line on short selling

To summarize, short selling is the act of betting against a stock by selling borrowed shares and then repurchasing them at a lower cost and returning them later.

It’s a relatively sophisticated (and risky) trading maneuver that requires a margin account and a keen understanding of the stock market. It may not be appropriate for stock market beginners, and some short selling maneuvers, like naked short selling, are illegal because of the risks they pose to others.

Short sellers have 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.

But short sellers often bring new information to light, leading the market to a more sober assessment of a company’s prospects. That can have the effect of keeping a stock at a lower price than it would have if only cheerleaders were on the sideline. The shorts help keep unbridled enthusiasm in check, and often they uncover fraud, aggressive accounting or just poorly run companies, information that may well be hiding in a company’s filings with the Securities and Exchange Commission. These are all valuable functions in the capital markets.

» Learn more about the differences between trading and investing.

If you’re thinking about trying it, be careful. The SEC warns that most traders lose money in their first months of trading, and many never turn a profit.

It’s a good rule of thumb to only trade with money that you can afford to lose.

Frequently asked questions

Is short selling the only way to bet against stocks?

Not at all — there are several different ways to profit from a decrease in stock prices, including put options and inverse ETFs. Each of these has its own unique advantages and disadvantages compared to short selling.

Why is short selling called short selling?

The origin of the term "short" is not certain, but the general consensus is that it refers to the fact that a short seller is selling assets that they don't own, and will need to buy later to make good on the trade. They are short of those assets for the duration of the trade.

In modern finance, the word "short" is used as a general synonym for "bearish" or betting on a decline, even when someone is not actually engaged in short selling. For example, a trader might refer to buying put options as "taking a short position." There's no actual short selling involved in that, but it's an alternative way of betting on a decline in a stock's price, so it's still sometimes called a short position.

More reading for active investors and traders

  • Stock Market Outlook

  • How to Trade Options

» Ready to get started? See our picks for the best day trading platforms.

Neither the author nor editor held positions in the aforementioned investments at the time of publication.

Short Selling: 5 Steps for Shorting a Stock - NerdWallet (2024)


What are the steps to shorting a stock? ›

To short-sell a stock, you borrow shares from your brokerage firm, sell them on the open market and, if the share price declines as hoped and anticipated, buy them back at the depressed price. Then, you give them back to your brokerage and pocket the difference, less any costs and fees.

How to short sell effectively? ›

Successful short selling relies on thorough market analysis. This involves understanding market trends, financial statements, and other indicators that suggest a stock might decrease in price. Entering and exiting positions at the right moment can make the difference between profit and loss.

What are the basics of short selling? ›

Short selling involves borrowing a security whose price you think is going to fall and then selling it on the open market. You then buy the same stock back later, hopefully for a lower price than you initially sold it for, return the borrowed stock to your broker, and pocket the difference.

What is short selling like I'm 5? ›

To summarize, short selling is the act of betting against a stock by selling borrowed shares and then repurchasing them at a lower cost and returning them later. It's a relatively sophisticated (and risky) trading maneuver that requires a margin account and a keen understanding of the stock market.

What is the math of shorting a stock? ›

The gain or loss on the covered short position during that week is applied to the balance. (Previous closing price - short cover price) x number of shares + balance = new ending balance.

Is shorting a stock illegal? ›

Short selling is legal because investors and regulators say it plays an important role in market efficiency and liquidity. By permitting short selling, a strategy that speculates that a security will go down in price, regulators are, in effect, allowing investors to bet against what they see as overvalued stocks.

How does short selling work for dummies? ›

Short selling occurs when an investor borrows a security and sells it on the open market, planning to repurchase later for less money. Short sellers bet on and profit from, a drop in a security's price.

What is the 10% rule for short selling? ›

The Alternative Uptick Rule

The rule is triggered when a stock price falls at least 10% in one day. At that point, short selling is permitted if the price is above the current best bid. 1 This aims to preserve investor confidence and promote market stability during periods of stress and volatility.

How much margin do I need to short sell? ›

It requires short trades to have 150% of the value of the position at the time the short is created and be held in a margin account. This 150% is made up of the full value, or 100% of the short plus an additional margin requirement of 50% or half the value of the position.

How to master short selling? ›

How to short a stock
  1. Decide whether you want to invest in shares or speculate on their price movements via derivatives.
  2. Open a position to 'sell' the stock you want to short.
  3. Monitor the market price to see if your prediction was correct.

What is an example of a short-sell order? ›

Short selling example – Rahul speculates that the current market price of stock ABC at Rs. 200 is way overvalued and expects that once its quarterly financial reports are out in a week, its share price will drop. He borrows 20 ABC stocks and sells them in the market at Rs. 200, thus getting "short" by 20 stocks.

What happens if you short a stock and it goes to zero? ›

For instance, say you sell 100 shares of stock short at a price of $10 per share. Your proceeds from the sale will be $1,000. If the stock goes to zero, you'll get to keep the full $1,000. However, if the stock soars to $100 per share, you'll have to spend $10,000 to buy the 100 shares back.

What are the top 5 most shorted stocks? ›

Most Shorted Stocks
Symbol SymbolCompany NameFloat Shorted (%)
SPWR SPWRSunPower Corp.94.89%
HOLO HOLOMicroCloud Hologram Inc.75.01%
PLCE PLCEChildren's Place Inc.68.89%
RILY RILYB. Riley Financial Inc.55.87%
44 more rows

Do you lose money on a short sale? ›

For a short sale to happen, both the lender and the homeowner have to be willing to sell the house at a loss. The homeowner will make no profit, and the lender will actually lose money for selling the house for less than the amount owed. A short sale is not a do-it-yourself deal.

Which stock is best for short selling? ›

S.No.NameCMP Rs.
1.Krishna Institu.1932.50
2.Apollo Hospitals5930.00
3.360 ONE779.00
4.Patel Engineerin62.25
20 more rows

How does shorting work for dummies? ›

Short selling is—in short—when you bet against a stock. You first borrow shares of stock from a lender, sell the borrowed stock, and then buy back the shares at a lower price assuming your speculation is correct. You then pocket the difference between the sale of the borrowed shares and the repurchase at a lower price.


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