Short Selling: What to Know About Shorting Stocks

What Does Shorting a Stock Mean?

By Matthew Frankel, CFP – Updated Jul 4, 2025 at 12:11 AM EST

Key Points

Short selling involves borrowing and selling stocks, aiming to profit from price drops.
It offers potential gains during bear markets but carries high risks and unlimited loss potential.
Buying put options is a safer alternative to shorting, limiting loss to the option's cost.
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Shorting a stock means opening a position by borrowing shares that you don't own and then selling them to another investor. Shorting, or selling short, is a bearish stock position -- in other words, you might short a stock if you feel strongly that its share price was going to decline.

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An infographic explaining how shorting a stock works in five steps. — Image source: The Motley Fool

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Short Squeeze

When many investors short a stock (bet against it) but the stock's price shoots up instead.

With short-selling, however, that dynamic is reversed. There's a ceiling on your potential profit, but there's no theoretical limit to the losses you can suffer. For instance, say you sell 100 shares of stock short at a price of $10 per share. Your proceeds from the sale will be $1,000.

If the stock goes to zero, you'll get to keep the full $1,000. However, if the stock soars to $100 per share, you'll have to spend $10,000 to buy the 100 shares back. That will give you a net loss of $9,000 -- nine times as much as the initial proceeds from the short sale. And if you think losses like this aren't possible, think again.

Still, even though short-selling is risky, it can be a useful way to take calculated positions against a particular company for investors who know what they're doing.

Managing your risk is important. But when used in moderation, short selling can diversify your investment exposure and give you an opportunity to capture better returns than someone who only owns stocks and other investments.

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Short Covering

When an investor buys shares of stock in order to close out an open short position.

Expert Q&A

About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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