Shorting

Shorting, or short selling, is a trading strategy that profits from a decline in the price of an asset. An investor who shorts an asset borrows shares or other units from a lender, sells them on the market, and plans to buy them back later at a lower price to return to the lender.

To execute a short sale, the trader borrows the asset through a broker and sells it at the current market price. If the price falls, the trader buys back the asset at the lower price, returns it to the lender, and keeps the difference after costs. If the price rises, the trader must buy back at a higher price, realizing a loss. Short selling is possible in markets such as stocks, bonds, commodities, currencies, futures, and options, and is used for speculation or hedging.

Costs and requirements include margin collateral, borrow fees for the loaned shares, and interest on the borrowed position. Short sellers may owe any dividends or distributions to the lender. The practice can be restricted by regulations, including requirements to locate shares before borrowing and limitations on naked short selling, depending on the jurisdiction. Settlement rules and borrow availability can also influence execution.

Risks and potential effects on markets are significant. Losses from short positions are theoretically unlimited, since a asset’s price can rise without bound. Short squeezes can occur when many traders cover positions simultaneously, driving prices up quickly. Critics argue short selling can add downward pressure in stressed markets, while proponents say it aids liquidity and price discovery.

Variants of shorting include using put options, inverse exchange-traded funds, or contracts for difference, which can mimic short exposure without directly borrowing the underlying asset.