GLOSSARY // Market Structure
Short Selling
Short selling is selling shares you have borrowed, betting the price falls so you can buy them back cheaper, return them, and keep the difference. Sell borrowed stock at $30, buy it back at $22, and the $8 per share is profit minus borrow costs.
Mechanically, the broker locates shares to borrow — SEC Regulation SHO requires a reasonable belief the shares can be delivered before the short sale is executed. The short seller pays a borrow fee while the position is open and owes any dividends the stock pays to the lender.
The risk profile is inverted from buying stock: maximum gain is 100% (stock goes to zero), maximum loss is unbounded, because there is no ceiling on how high a stock can rise. That asymmetry is what fuels short squeezes.
A trader shorts 1,000 shares of QRS at $45.00, posting margin. The stock reports weak earnings and drops to $36.50; the trader buys back and nets $8,500 before fees. Had QRS been acquired at $70 instead, the loss would have been $25,000 — nearly three times the intended reward.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.