Short Selling

The mechanics work in three steps: borrow, sell, and repurchase. A short seller borrows shares (or another asset) from a broker, sells them at today's market price, and aims to buy them back — covering the short — after the price has fallen. The profit is the difference between the sale price and the repurchase price, minus any borrowing fees paid along the way. If the price rises instead, the loss is theoretically unlimited, because there is no ceiling on how high a price can go.

Short selling serves two broad functions in markets. Speculators use it to express a negative view on an asset's price. Hedgers — such as a fund that owns a stock portfolio — use it to offset, or reduce, their exposure to a falling market without selling their core holdings. The distinction between these motivations matters for how economists interpret short-selling data.

Historically, markets have used short interest — the total number of shares currently sold short as a percentage of shares available — as a gauge of bearish sentiment. Very high short interest can set the stage for a short squeeze. Short selling is regulated differently across jurisdictions; some markets impose temporary bans during periods of severe stress. It appears across stocks, commodities futures, and crypto markets.