When an investor or trader enters a short position, he or she does so with the intention of profiting from falling prices. This is the opposite of a traditional long position where an investor hopes to profit from a rising market.

A brokerage firm lends shares or contracts to the customer who engages in the short sale. The firm uses its own inventory, another customer's margin account or another lender to supply the shares or contracts to the shorting customer. The customer typically pays interest on the loan, and if a borrowed stock pays a dividend, the customer is also responsible for paying the original owner the value of the dividends.

In theory, you could keep a short position open indefinitely to take advantage of a falling market. Technically, you could be required to "buy to cover" this position if the lender demanded the shares or contracts back; however, this would be uncommon.

You must have a margin account to short stocks, and you could also be forced to close the position if you receive a margin call. Your broker will issue a margin call if the value of your account falls below a certain threshold, and the broker can liquidate any position in your portfolio without consulting you. The broker has the right to decide which positions to close, including any short positions.

  1. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  2. How can an investor profit from a decline in the real estate sector?

    Speculation enables investors to profit from a decline in the real estate sector. The most popular forms of speculation for ... Read Full Answer >>
  3. How can I evaluate if a stock is a short squeeze?

    To evaluate whether a stock is a short squeeze, traders should examine its fundamentals, short interest and price history. ... Read Full Answer >>
  4. What is the difference between a short squeeze and short covering?

    "Short covering" and "short squeeze" are different terms to describe a situation involving short positions. A short squeeze ... Read Full Answer >>
  5. How does days to cover a short position relate to a short squeeze?

    Days to cover a short position reveals the intensity and duration of a potential short squeeze. A short squeeze occurs when ... Read Full Answer >>
  6. What is the difference between speculation and hedging?

    Speculators and hedgers are different terms that describe traders and investors. Speculation involves trying to make a profit ... Read Full Answer >>
Related Articles
  1. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  2. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  3. Investing

    Watch Your Duration When Rates Rise

    While recent market volatility is leading investors to look for the nearest exit, here are some suggestions for bond exposure in attractive sectors.
  4. Investing

    A Quick Explanation of How Short Selling Works

    Explanations of short selling can be hard to grasp. Here is a quick, realistic example.
  5. Chart Advisor

    Downtrending Stocks to Short or Sell

    These stocks are trending lower and currently near a short sale areas, based on breaks lower and falling stock indexes.
  6. Chart Advisor

    Second Chance Entries Into Completed Double Tops

    These stocks have already completed double top chart patterns, and are right now offering a second chance to trade it.
  7. Forex Strategies

    This Might Be the Best Time to Buy Colombian Pesos

    Signs are growing that energy markets are bottoming out, allowing the Colombian Peso to recover its value in a profitable trend against the U.S. Dollar.
  8. Active Trading Fundamentals

    Short Selling Tutorial

    Short selling makes it possible to sell what one does not own, by borrowing an asset, selling it, and then buying it back to replace the borrowed asset.
  9. Stock Analysis

    What Led to Lumber Liquidators' Decline?

    Read about how a "60 Minutes" story on laminate flooring sold by Lumber Liquidators led to a massive decline in the share price for the company.
  10. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  1. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  2. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  3. Gross Exposure

    The absolute level of a fund's investments.
  4. David Einhorn

    Known for his short selling strategy, activist investor David ...
  5. Short Call

    A type of strategy regarding a call option, which is a contract ...
  6. Long-Short Ratio

    The amount of a security available for short sale compared to ...

You May Also Like

Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!