What is selling short

There are many restrictions on the size, price and types of stocks you are able to short sell. For example, you can't short sell penny stocks and most short sales need to be done in round lots. Short selling also requires that you put up margin. As with a margin buy long transaction, the percentage required varies depending on the eligibility of individual securities.

All trading basics What is Short Selling? The Basics When an investor goes long on an investment, it means she has bought a stock believing its price will rise in the future. Why Short? There are two main motivations to short: 1. Part Of. Day Trading Basics. Day Trading Instruments. Trading Platforms, Tools, Brokers. Trading Order Types.

Day Trading Psychology. Table of Contents Expand. What Is Short Selling? Understanding Short Selling. Why Sell Short? Pros and Cons of Short Selling. Additional Considerations with Short Selling. Costs of Short Selling. Short Selling Metrics.

Ideal Conditions for Short Selling. Short Selling's Reputation. Real-World Example of Short Selling. Why Is it Called Selling Short? Is Short Selling Bad? What Is a Short Squeeze? Key Takeaways Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money. Short-sellers bet on, and profit from, a drop in a security's price. This can be contrasted with long investors who want the price to go up.

Pros Possibility of high profits Little initial capital required Leveraged investments possible Hedge against other holdings. Cons Potentially unlimited losses Margin account necessary Margin interest incurred Short squeezes. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Short Squeeze A short squeeze occurs when a stock moves sharply higher, prompting traders who bet its price would fall to buy it in order to avoid greater losses. Rebate A rebate in a short-sale transaction is the portion of interest or dividends paid by the short seller to the owner of the shares being sold short.

Short interest theory states that high levels of short interest are a bullish indicator. Its proponents will seek to buy heavily shorted stocks.

What Is a Convertible Hedge? A convertible hedge is a strategy where an investor buys a convertible bond and then shorts the stock to increase the overall yield. Credit Balance Definition Credit balance refers to the funds generated from the execution of a short sale that is credited to the client's account. What Is a Stock Loan Rebate?

A stock loan rebate is an amount of money paid by a stock lender to a borrower who has used cash as collateral for the loan. Partner Links. Related Articles. Stocks How to Short Amazon Stock. A bold short is the one placed on Apple Inc.

When a well-known investor announces a short position, it does not mean you should necessarily follow suit. The professional short investor also may have access to technical and financial analysis that you do not. If a known money manager is short a stock you are interested in, or holding, at least do additional research on your own.

Meanwhile, unless you are a professional money manager who has built up sufficient expertise through years of study to play the game, stick with long positions for your investments. Your long run can be much longer if you buy stocks when the market is expensive and exuberant.

Follow him on Twitter PhilipvanDoorn. Stock Market Basics. Stock Market. Industries to Invest In. Getting Started. Planning for Retirement. Retired: What Now? Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. New Ventures. Search Search:. Updated: Oct 8, at PM. Matt specializes in writing about bank stocks, REITs, and personal finance, but he loves any investment at the right price.

Follow him on Twitter to keep up with his latest work! Image source: Getty Images.