Short Selling 101 - A Beginner's Guide

2025-08-12

Short Selling 101: A Beginner’s Guide

Short selling is one of the most talked-about – and often misunderstood – strategies in the stock market. From famous short squeezes like GameStop to debates over naked shorting, the concept sparks curiosity among beginners and seasoned traders alike. In this guide, we break down everything you need to know about short selling, including what it is, how it works, and how investors profit when stock prices fall. 

 

You’ll learn the difference between legal short selling and banned practices like naked shorting, discover how to track short positions using tools like ShortRegister.com, and understand where and how you can short a stock. Whether you’re new to trading or just curious about market mechanics, this article will give you a clear, beginner-friendly overview of short selling and its risks.

What is short selling?

Short selling (or “shorting”) is an investing strategy where you profit from a stock’s price going down instead of up. In a short sale, an investor borrows shares of a stock and immediately sells them, hoping to buy those shares back later at a lower price. Essentially, it’s the reverse of the usual “buy low, sell high” approach – you sell high now and aim to buy low later. If the stock’s price does indeed drop, the short seller can repurchase the shares at the lower price, return them to the lender, and keep the difference as profit.

How does short-selling work?

Short selling works in a few steps: 

1. You borrow shares of a stock from your broker (brokers have pools of shares they can lend out for this purpose). 
2. You sell the borrowed shares on the open market at the current price. 
3. Later, you’ll need to buy the same number of shares back (this is called “covering” your short) and return them to the broker to close the short position. The goal is to buy back at a lower price than you sold for – that price difference is your gain.

For example, suppose you short sell 500 shares of Company XYZ at $100 per share, bringing in $50,000 from the sale. If the stock price falls to $95, you can buy 500 shares back for $47,500 and return them, netting a $5 per share profit (about $2,500 total) in the process. This profit comes because you sold high and later bought low. However, if the price goes up instead of down, you’d have to buy back at a higher price and would incur a loss.

Is short selling illegal? What about naked shorting?

Short selling itself is legal in most major markets as a regulated practice. Investors and funds commonly short stocks to speculate on price drops or hedge other positions, and regulators allow it because it can add liquidity and help expose overvalued stocks. There are, however, rules in place to ensure short sellers actually borrow shares before selling them.

What’s often illegal (or heavily restricted) is naked short selling – this is when someone tries to short a stock without borrowing the shares first (essentially selling shares they haven’t secured or don’t intend to deliver). Naked shorting creates “phantom” shares and can disrupt markets, so regulators ban it in many regions. In practice, your broker must locate and reserve shares for you before you short sell, precisely to prevent naked short sales. As a beginner, you won’t have to worry about executing a naked short – brokerage systems and laws are designed to stop it.

How can I track short positions?

ShortRegister.com provides daily updated short position data for stocks in various European markets. ShortRegister lets you see which companies are most shorted and which funds are shorting them, with data pulled from official regulatory disclosures. Using such trackers, an investor can monitor if short interest in a stock is rising or falling, which may signal market sentiment (e.g. very high short interest can sometimes set the stage for a short squeeze if positive news drives the price up).

How do you earn money shorting stocks?

The way you make money shorting stocks is by selling high now and buying back lower later. If you sell borrowed shares at, say, $50 each and later repurchase them at $40 each, you earn the $10 per share difference as profit (minus any borrowing fees or commissions). The key is that the stock’s price needs to drop after you short it. Short selling profits aren’t realized until you close the position – which means buying the shares back. So, you “earn” money by correctly predicting a price decline and executing the short trade before that drop, then covering your short at the cheaper price.

What is the risk when shorting stocks?

It’s important to note that shorting comes with significant risk. If the stock’s price rises instead of falls, a short seller loses money because they’ll have to buy back at a higher price than they sold. For example, if you short a stock at $50 and it jumps to $60, closing the position would mean a $10 per share loss. There is theoretically no limit to how much a stock’s price can rise, so your potential losses on a short are unlimited (unlike a regular stock purchase, where the worst-case is the stock goes to $0). This is why short selling is often described as high-risk – you can earn profits if you’re right about a price drop, but if you’re wrong, losses can mount quickly. Always use risk management strategies (like stop-loss orders) when shorting to protect yourself.

Where can I short stocks?

You can short stocks through any brokerage that offers margin accounts for trading. Most major online brokers and traditional broker firms allow short selling as long as your account is approved for margin trading. In practice, this means you need to open a margin account (which may require a minimum balance and comes with its own rules) so that the broker can lend you shares to short. Once your margin account is set up, you simply place a short sell order for the stock you’re targeting – your broker will automatically borrow the shares and sell them on your behalf.