Short Selling

What is short selling

Short selling is an investment strategy in which an investor seeks to profit from a decline in the price of an asset, most often stocks. The investor borrows shares from a broker, sells them on the market, and later buys them back at a lower price to return them. The profit is the difference between the sale price and the repurchase price (after subtracting fees and any interest).

How short selling works

1. The investor borrows shares from a broker.
2. Sells them on the market at the current price.
3. Buys them back (ideally at a lower price) to return them to the original owner.

If the share price falls, the investor profits. If the price rises, they incur a loss.

Why investors short sell

• To speculate on a decline in a stock's price.
• To hedge a portfolio against a drop in the value of held assets.
• To exploit market imbalances and a company's fundamental problems.

Risks of short selling

• Unlimited losses – unlike buying a stock, where the price cannot fall below zero, the price can theoretically rise without limit.
• Short squeeze – a sharp price rise where short sellers rush to close positions, pushing the price up even further.
• Fees and interest for borrowing shares can reduce the profit.

Short selling on Stonkee

On Stonkee you can track the short interest on individual stocks and assess the risk of a short squeeze. AI tools alert you to sharp increases in short positions or anomalies in trading volumes.

Summary

Short selling is an advanced strategy that can deliver high profits but also significant losses. It is best suited to experienced investors who understand its risks and can manage them.