Short selling

Short selling means selling a stock you do not own. Usually your broker lends you the shares, and you sell them right away.

Later you buy the same number of shares back and return them. If the price fell, you make a profit. If the price rose, you lose money.

Owning a stock is called a long position. Short selling is the opposite, a short position.

Why it matters

When you own a stock, you can lose at most what you paid. When you sell short, your losses have no limit, because a price can keep rising. You also pay interest on the borrowed shares, and margin rules apply. If the stock pays a dividend, you must pay it to the lender.

A worked example

You borrow shares at $60 each and sell them. If the price falls to $40, you buy them back and make $20 a share, minus fees. If the price rises to $80, you lose $20 a share, plus fees.