Short selling

Investing glossary · Markets and instruments

Borrowing shares to sell them now, hoping to buy them back cheaper later and keep the difference.

Definition

In a short sale an investor borrows shares, sells them at the current price and later buys them back to return to the lender. If the price has fallen in the meantime, the investor keeps the difference; if it has risen, the investor takes a loss. It is a way to bet against a stock or to hedge a long position.

The risks are asymmetric. When you buy a stock, the most you can lose is what you paid. When you short, the price can rise without limit, so the potential loss is theoretically unlimited. Shorts also pay borrowing fees, and a rapid rise can force buybacks at bad prices (a short squeeze). That is why platforms often cap the size of short positions.

Formula

Profit = (sale price − buy-back price) × shares

Shares × (price when sold − price when bought back), before fees and borrowing costs.

Worked example

Illustrative numbers

You short 100 shares at $50 each. If the price falls to $40 and you buy them back, you make ($50 − $40) × 100 = $1,000. If instead it rises to $80, you lose ($80 − $50) × 100 = $3,000, and it could keep rising.

The numbers are illustrative; they show that a gain is capped at the stock going to zero while a loss has no ceiling.

How ATLAS uses it

The ATLAS Trading Desk supports short positions in its simulated environment, and in the ATLAS × IE challenge short positions are capped at 50% of portfolio value.

Frequently asked questions

Why is short selling riskier than buying?

Because a stock can rise by far more than 100%, so losses can exceed the amount you originally put up. A purchase can lose at most 100%.

What is a short squeeze?

A rapid price rise that forces short sellers to buy back shares to limit losses, which pushes the price up further.

Related terms

Put the idea to work on your own stocks

Open any company in ATLAS to see its fair value, its odds of rising and its risk numbers side by side.

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Not investment advice. ATLAS estimates are produced by statistical models from public data; they can be wrong and past performance does not predict future results. Consider your own situation before investing. Disclaimer