Short Selling
Definition
Selling borrowed shares with the expectation of buying them back at a lower price. Short sellers profit when a stock's price falls and lose when it rises.
Short selling is the mechanism for profiting from a price decline. You borrow shares from your broker, sell them at the current price, and hope to buy them back later at a lower price. The difference between the sell price and the buy-back price (minus borrowing costs) is your profit.
For example, if you short 100 shares at $50 ($5,000 proceeds) and the stock falls to $30, you buy back 100 shares for $3,000, returning them to the lender. Your profit is $2,000 minus borrowing fees. If the stock rises to $70, you'd lose $2,000 plus fees.
The key risk of short selling is theoretically unlimited losses. A stock can only fall to $0 (limiting your gain to the sale price), but it can rise indefinitely. GameStop's short squeeze in 2021, where the stock rose from $20 to $483, devastated short sellers with billions in losses.
Short selling requires a margin account and is subject to specific regulations. The uptick rule (reinstated in modified form) restricts short selling during rapid declines. Short interest (the percentage of shares currently sold short) is publicly reported and watched as a contrarian indicator.
For portfolio tracking, short positions are recorded as negative holdings. Their value increases when the stock falls and decreases when it rises — the opposite of long positions. Short sale proceeds, dividends owed on borrowed shares, and borrowing costs all need proper tracking for tax reporting.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Frequently Asked Questions
Can I short sell crypto?
Yes, through crypto derivatives platforms that offer margin trading and perpetual contracts. You can also short crypto via inverse ETFs in traditional brokerage accounts. Short selling crypto carries the same risks as short selling stocks, amplified by crypto's higher volatility.
Why do short sellers have to pay dividends?
When you borrow and sell shares, the buyer expects to receive dividends. Since the original owner also expects dividends, the short seller must pay the dividend amount to the lender (known as 'payment in lieu of dividends'). This is an additional cost of maintaining a short position.