How to Short a Stock

To short a stock, borrow shares from a broker and sell them right away at the current price. If the price drops, you buy the shares back for less, return them to the broker, and keep the difference as profit. If the price rises instead, you still have to buy back the shares, so your losses can keep growing.

How To Short A Stock

Key Terms

• Short Squeeze: A rapid increase in the price of a stock causing shorters to buy back their borrowed stock due to margin calls and to prevent greater losses.
• Covering A Position: Buying back borrowed shares from an original short position in order to no longer be short a particular stock.
• Hedging: Reducing risk in portfolio by buying one asset and shorting another.

The Basics

Once you’re comfortable with traditional investing- that is, purchasing shares of companies that you believe will generate future profits and returns, now it's time to discuss the opposite! Shorting a stock is a way to profit from the decline of a company’s share price.

Short sellers borrow shares of the company they are betting against from a broker, sell those shares at the current price, and then buy them back at a later date to give back to the lender. If the share price does drop, the short seller collects the difference between the higher and lower price. This model has the potential for significant profits, depending on the timing of the short.

Quick Calculations

Say you’re convinced that all Americans will become vegetarian in the next two years, putting all meat packing companies out of business. You establish a short position in a meat packing establishment, and borrow 10 shares at $7 each from your broker. If you later buy back and return the shares at $2 each, you earn a profit of $50.

Why Go Short?

Investors take short positions to profit from declines either across the market or in a specific sector or company. Short positions can also mitigate risk in a portfolio. However, short selling is best attempted by experienced or institutional investors. As much potential as short selling has to result in profit, there is infinite potential for loss as well.

The Bottom Line

Shorting allows investors to capitalize on market downturns by borrowing the stock from a shareholder and selling it with a promise to repurchase later.

Losses with shorting can technically be unlimited, so proceed with caution before shorting a stock. Hedge funds and experienced investors take short positions to protect long term gains and sometimes they get big returns.

Questions:

1. What is a short squeeze?
2. How could short selling be used as a hedging strategy in a diversified portfolio and what are the risks?
3. Why is short selling considered risky?

The Risk That Makes Shorting Different

Buying a stock has a floor: the worst case is the price falls to zero, capping your loss at what you invested. Shorting flips that math. A stock you are short can, in theory, keep climbing forever, and every dollar it climbs is a dollar you owe when you eventually buy the shares back. That asymmetry is why short selling is generally left to experienced or institutional investors rather than beginners.

A short squeeze makes that risk concrete. When a heavily shorted stock starts rising fast, short sellers who borrowed shares get margin calls forcing them to buy back stock to cover their position, and that buying pressure pushes the price up even further, forcing more shorts to cover in a feedback loop. That loop is supply and demand compressed into hours instead of months, forced demand meeting limited supply, the exact mechanic practiced in a supply and demand worksheet.

Watching price action is the best way to build intuition for this risk before real money is involved. Students can track a company’s live price on Rapunzl Market Data and test how a short position would have played out using a virtual $10,000 portfolio in the Rapunzl simulator, without risking a cent of real money on a trade with unlimited downside.

Running the numbers on a practice short is also the fastest way to internalize why timing matters so much here. Borrow the same 10 shares from the earlier example, but let the price rise instead of fall, and the loss keeps growing for as long as the position stays open, with no floor to catch it.

Try It Yourself

This article is a sample from Rapunzl's The Opposite of Buying: Shorting unit (Module 16). Rapunzl has reached 150,000+ students since 2018 — 81% students of color, with 83% of partner schools in low- and moderate-income communities.