Short Selling
Definition
Short selling is borrowing shares from a broker and selling them at the current price with the intention of buying them back later at a lower price — profiting from the price decline, but with theoretically unlimited loss potential if the stock rises instead.
Example
“I shorted 500 shares of a low-float stock at $12.40 after it broke the prior day's high on weak volume. It faded to $10.90 and I covered for a $750 gain. The key was that the pump had no real volume behind it — sellers were in control.”
Detailed Explanation
Short selling allows traders to profit from falling prices, but it's mechanically the reverse of going long. When you short, your broker locates and lends you shares from other clients' accounts or from its own inventory. You sell those borrowed shares immediately at market price. If the stock falls, you buy them back (cover) cheaper, return them to the lender, and pocket the difference. The risk is that if the stock rises instead, you still have to buy them back — at whatever the market price is. There's no cap on how high a stock can go, meaning theoretical loss on a short is unlimited, unlike a long where the maximum loss is 100% of the position value.
Shorting requires specific conditions at the broker level. Shares must be available to borrow, which isn't always the case — heavily shorted stocks can have "hard to borrow" (HTB) status where borrowing cost is elevated (sometimes 100%+ annualized fee for the borrow), or "no locate" status where you simply cannot borrow shares at all. This is why heavily shorted stocks with high short interest are prone to short squeezes — if the stock starts rising, shorts can't easily add to their position, and many must cover simultaneously, creating the violent upward move. Understanding borrow availability and cost before entering a short is essential operational knowledge.
Short selling discipline differs from long-side trading in one important way: the natural behavior of the market is to trend upward over time, which means shorts are fighting the fundamental bias of the equity market. The best short setups have a specific catalyst for the decline (earnings miss, failed breakout, sector-wide weakness), a clear technical breakdown pattern (lower lows, rejection at resistance, break of support), and ideally a stock with weak fundamentals that gives you conviction the decline is warranted. Shorting simply because something looks "too high" without those elements is a dangerous habit that will teach you a painful lesson about how long a stock can stay overvalued.