Short selling is borrowing shares of a stock (or another asset) from your broker, selling them at the current market price, then buying them back later at a (hopefully lower) price and returning them. The profit is the difference between the sell price and the (lower) repurchase price. It's a way to profit when you believe a price will fall.

How It Works Step by Step

  1. You borrow 100 shares of XYZ from your broker. XYZ is trading at $80.
  2. You sell the borrowed shares for $8,000 (100 × $80).
  3. XYZ falls to $60. You buy 100 shares in the market for $6,000.
  4. You return the 100 shares to your broker. Profit = $8,000 − $6,000 = $2,000 (minus borrowing fees and commissions).

If instead XYZ rises to $100, you still need to buy back the shares to close the short. You buy at $10,000 and return them — a $2,000 loss on a $8,000 initial position.

The Asymmetric Risk of Short Selling

Long positions have a maximum loss of 100% (the stock goes to zero). Short positions have theoretically unlimited maximum loss — a stock can rise 200%, 500%, or more, and you're obligated to buy it back at the market price to close. This is why stops on short trades are non-negotiable and position sizing must account for the potential for rapid adverse moves.

The Position Size Calculator works identically for short positions: risk per share = stop loss price − entry price (for a short, stop is above entry). Calculate lot size or share count from your dollar risk and that distance.

Short Squeeze Risk

A short squeeze occurs when a heavily shorted stock rises rapidly, forcing short sellers to buy back shares to cut losses. Their buying pressure drives the price even higher, triggering more short covering in a feedback loop. Short squeezes are among the most violent price moves in equity markets. For any short position, be aware of the short interest ratio (days to cover) — high short interest increases squeeze risk.