Section 2 · Market Mechanics
Short Selling
How traders profit when a stock falls.
Sell first, buy back later — hopefully cheaper.
Borrow shares → sell → wait for drop → cover at lower price → return shares, keep difference. Risk: losses are theoretically unlimited because a stock can rise forever.
3 things to know
Short sellers profit when a stock falls — they sell what they do not own.
Borrow fees on hard-to-short stocks can exceed 200% annually.
Losses are unlimited — if the stock rises instead of falls, there is no ceiling.
Dive Deeper
Unlimited Downside Risk
Unlike buying, short-selling losses have no ceiling. Short at $10, stock goes to $1,000 — you owe $990 per share.
Borrow Fees Add Up
Hard-to-borrow stocks charge 50–300%+ annual borrow fees that accrue daily regardless of whether the stock moves.
Locate First
Your broker must locate shares to lend before you can short. Naked shorting (without locating) is illegal.
Key vocabulary — tap each card
Practice
How a short sale works
Borrow shares
Your broker locates shares from another account to lend you.
Sell immediately
You sell the borrowed shares at the current market price.
Wait for price to fall
You now hold a short position — you profit if the stock drops.
Buy back (cover)
You repurchase the shares at a lower price to close the position.
Return shares, keep profit
Return the shares to the lender. Your profit = sell price minus buy price minus fees.
Did you know?
Max gain on a short = 100% (stock goes to $0). Potential loss = infinite. That asymmetry is why experienced traders size short positions much smaller than longs.