What short selling is

Short selling is a way to profit if a share price falls. Here is how it works, why the risk has no upper limit, and what a short squeeze is.

Most investors buy a share and hope the price rises. Short selling works the other way. A short seller makes money if the price falls and loses money if it rises.

How it works

A short seller does not own the shares to begin with. The process goes like this:

1. Borrow. The investor borrows shares, usually through their broker. The broker finds the shares from its own holdings or from other clients.
2. Sell. The investor sells the borrowed shares right away at today's price.
3. Wait. The investor keeps the position open, often hoping the price falls.
4. Buy back. Later, the investor buys the same number of shares on the market.
5. Return. Those shares go back to the lender, and the position is closed.

The profit or loss is the difference between the selling price and the buying price, minus costs.

A simple example

An investor borrows 100 shares and sells them at $50 each. They receive $5,000.

If the price falls to $40, they buy 100 shares back for $4,000. They return the shares and keep $1,000, before fees.

If the price rises to $65 instead, buying back costs $6,500. They lose $1,500, plus fees.

Why the risk is different

When you buy a share, the most you can lose is what you paid. A share price cannot fall below zero.

A short seller faces the opposite. A share price has no upper limit. If the price keeps climbing, the cost of buying it back keeps climbing too. In theory, the loss on a short position has no limit.

This is the main reason short selling is considered a high-risk strategy.

The costs

Short selling has costs that a normal purchase does not.

• Borrowing fees. The lender charges a fee to lend the shares. Fees are low for widely held stocks and can be high for stocks that are hard to borrow.
• Dividends. If the company pays a dividend while the position is open, the short seller must pay that amount to the lender.
• Margin interest. Short selling is done in a margin account, which lets you borrow from your broker. Interest can apply.

Margin and margin calls

A margin account is a brokerage account that allows borrowing. Brokers require short sellers to keep a minimum amount of value in the account as security.

If the shorted stock rises, that security shrinks. The broker may issue a margin call, which is a demand to add more money or shares. If the investor does not, the broker can close the position, often at a loss.

What a short squeeze is

A short squeeze happens when a heavily shorted stock starts to rise quickly. Short sellers rush to buy shares to close their positions and limit losses. That buying pushes the price up further, which forces more short sellers to buy.

Squeezes can cause very sharp price jumps over a short time. They often have little to do with how the business is doing.

Short interest

Short interest is the number of a company's shares that have been sold short and not yet bought back. It is often shown as a percentage of the shares available to trade.

High short interest means many investors expect the price to fall. It can also mean a squeeze is more likely if the price starts rising. Short interest data is published regularly, but with a delay.

Why short selling exists

Short selling plays a few roles in markets.

• Hedging. Some investors short a stock or an index to offset risk in other holdings. Hedging means reducing the risk of one position with another.
• Price discovery. Short sellers can bring negative information to light, which helps prices reflect what is known about a company.
• Trading volume. Short selling adds buyers and sellers, which can make trading smoother.

Critics argue that short selling can add pressure to falling prices. Regulators in both the US and Canada have rules on how short sales can be made and reported, and they have sometimes added temporary limits during periods of stress.

Can you short in a tax-sheltered account?

Usually not. Short selling needs a margin account. Registered accounts such as a TFSA or RRSP in Canada, and IRAs in the US, generally do not allow it. Rules depend on the account and the broker.

Other ways to bet on a fall

Some investors use options or inverse ETFs instead. These are separate products with their own risks and rules. You can read about ETFs in general in what an ETF is.

The short version

• Short selling means selling borrowed shares and buying them back later.
• The short seller profits if the price falls and loses if it rises.
• Losses on a short position have no fixed upper limit.
• It has extra costs, including borrowing fees and any dividends paid.
• A short squeeze is a sharp rise driven by short sellers buying back shares.

This is general information, not investment advice.

Updated 9 October 2026