What is short selling?
Short selling allows you to make money on a stock that is falling in price.
The normal process of "going long" involves buying
first and selling last, hopefully at a higher price.
Short selling is the same concept of buying low and selling
high, but in the reverse order. You borrow some stock from
your brokerage and immediately sell it on the market. After
the stock drops in price you must buy some shares from the
market and return them to your brokerage. It sounds complicated
at first, but it is really almost as easy as "going
Here is the process:
Short selling is not as common as going long for several reasons:
- Request the short sell from your brokerage.
- Your brokerage will lend you the shares, if they have
them available. It's not uncommon for the shares to be
- Your brokerage will immediately try to sell the shares
on the stock market.
- Cash from the sale goes into a special short-sell account
that you cannot access. It is used as collateral for the
shares that you borrowed.
- Wait for the stock to go down.
- Finish the trade by choosing "Buy to Cover."
This action will buy shares from the market and return
them to your brokerage. You will have made a profit if
your short sale price was higher than your buy back price
(minus any commissions).
- Note that your brokerage may request that you return
the shares at any time. They may need to return the shares
to other customers.
- It requires a margin
account, which has special requirements.
- There is the risk of losing more than 100% of your money
from your investment portfolio.
- Some people consider it wrong to bet against a company.
Despite these concerns, short selling
is successfully used every day by thousands of traders. It is actually
a healthy part of the markets. For example, when the markets
are having a bad day, who is buying the shares that most
people are trying to get rid of? Short sellers are, along
"longs" who are trying to buy at bargain prices.
They are trying to cover their shorted positions and take
Our stock market site trading game requires 50% collateral
for the initial short sale value, which is similar to real brokerage requirements.