Short selling means selling an asset without owning it, hoping to buy it back later at a lower price to pocket the difference. It's the only way to profit from a market decline.
Classic mechanism on stocks:
- You borrow 100 Tesla shares from your broker (who borrows from a fund)
- You immediately sell them at $250 → you receive $25,000
- Tesla drops to $200 → you buy back 100 shares for $20,000
- You return the 100 shares, keep the difference: $5,000 gain
On CFDs or Forex, it's simpler: clicking "Sell" opens a short position, no physical borrowing needed.
Short-specific risks:
- Theoretically unlimited loss: an asset can rise indefinitely. Shorting Tesla at $250 and it rallies to $1,000 = $750/share loss. By contrast, a long can only lose the stake (stock can't go below 0)
- Short squeeze: rapid rises force shorts to cover (buy back), amplifying the move (GameStop Jan 2021: +1,700% in 2 weeks)
- Borrow fees on stocks: typically 0.3-5%/year, can reach 100%+ on meme stocks
- Dividend pass-through: if the stock pays a dividend during your short, you must reimburse it to the lender
Regulators sometimes impose temporary short-selling bans during stress periods (March 2020 Covid, July 2024 on some EU banks) to prevent self-fulfilling panics.