Short Selling: Complete Guide with Facts, History & How-To

Short Selling: Complete Guide with Facts, History & How-To

Short selling is a trading strategy where an investor borrows shares of a stock and sells them at the current market price, 

hoping to buy them back later at a lower price and return them to the lender — making a profit from the price difference.

Why People Short Sell

Speculation: Profit from falling prices.

Hedging: Protect against downside risk in a long position.

Arbitrage: Exploit mispricing between related assets.

History of Short Selling -

1600s (Dutch East India Company): 

The earliest recorded short sale happened in the 17th century in the Netherlands.

1907 & 1929 Crashes: 

Short selling was blamed (rightly or wrongly) for exacerbating stock market crashes.

1940s (U.S. Regulations): 

The SEC introduced regulations to limit abusive short selling.

2008 Crisis: 

Temporary bans were imposed on short selling financial stocks.

2021 GameStop Saga: 

Retail traders on Reddit squeezed hedge funds that were heavily shorting GameStop, causing huge losses.

How Short Selling Works (Step-by-Step)

Borrow Shares: 

Through your broker, you borrow the stock from someone else's holdings.

Sell the Stock: 

You immediately sell those borrowed shares at the current market price.

Wait: 

You monitor the stock, hoping it drops in price.

Buy Back (Cover the Short): 

You repurchase the shares at the new, lower price.

Return Shares: 

You give back the borrowed shares to the broker.

Profit/Loss: 

Your profit is the difference between the selling price and the buying price (minus fees and interest).

Example

Suppose you think Stock A (currently ₹100) will drop.

You borrow and sell 10 shares = ₹1,000

Price drops to ₹80 → You buy 10 shares for ₹800

Return shares to lender → Profit = ₹1,000 - ₹800 = ₹200

Total Profit is Rs. 200   

When does short selling result in loss?

Short-selling can result in a loss when the speculation of an investor does not come true and the price of the shorted stock goes up

Pros of Short Selling -

Profit in a falling market

Adds liquidity to markets

Helps expose overvalued or fraudulent companies

Risks of Short Selling -

Unlimited Loss Potential: 

If the stock price rises instead of falls, losses can be huge.

Short Squeeze: 

A rapid price increase forces short sellers to cover, pushing the price even higher.

Margin Calls: 

Brokers may require additional funds if the trade moves against you.

Borrow Costs: 

You pay interest to borrow the shares.