shortselling

Short selling, or shorting, is the sale of a security that the seller has borrowed with the obligation to return an equivalent number of shares. The seller borrows the shares, sells them on the market, and aims to profit if the price falls by buying back later at a lower price and returning the shares to the lender. If the price rises, losses can be substantial, since the seller must still buy back the shares. The short seller may owe any dividends paid during the borrow period to the lender, and the borrow itself typically incurs costs or interest.

Process and risks are central to the practice. A broker locates shares to borrow, executes the short sale, and holds the sale proceeds in a margin account or uses them as collateral. The shares must be bought back later to close the position, or the seller must deliver equivalent shares. If the lender recalls the borrowed shares, the short position must be closed. Risks include unlimited potential losses, margin calls, borrow fees, and the possibility of a short squeeze when a heavily shorted stock rapidly rises and short sellers are forced to cover at higher prices.

Regulation and market effects vary by jurisdiction. Many markets impose rules to prevent abusive practices, such as requiring the presence of a borrow before selling short (a locate requirement) and prohibiting naked short selling. Regulations may also mandate disclosure of large short positions and impose penalties for failure to deliver shares.

Short selling can play a role in hedging, speculation, and price discovery. It can increase liquidity but is controversial when used to bet against companies or to amplify declines during stressed markets. A related phenomenon is the short squeeze, where rapid covering pushes prices higher.