A:

One way to make money on stocks whose price is falling is called short selling (or going short). Short selling is a fairly simple concept: you borrow a stock, sell the stock, and then buy the stock back to return it to the lender.

Short sellers place a bet that the stock they sell will drop in price. If the stock does indeed drop after selling, the short seller buys it back at a lower price and returns it to the lender.

For example, if an investor thinks that Tesla (TSLA) stock is overvalued at \$315 per share, and is going to drop in price, she may borrow 10 shares of TSLA from her broker and sell it for the current market price of \$315. If the stock goes down to \$300, she could buy the 10 shares back at this price, return the shares to her broker, and net a profit of \$315 (selling price) - \$300 (buying price) = \$15 per share.

However, if TSLA price rises to \$355, the investor could net \$315 - \$355 = - \$40 loss per share.

## What are the risks?

If you can't see the amplified risk right now, let's make it obvious: when you buy a stock (or go long) you can lose only the money that you've invested. So, if you bought one TSLA share at \$315, the maximum you could lose is \$315 because the stock cannot drop to less than \$0. In other words, the minimum value that any stock can fall to is \$0.

However, when you short sell, you can theoretically lose an infinite amount of money, because a stock's price can keep rising forever. Like in the example above, if you had a short position in TSLA (or short sold it) and it ended up rising to \$355 before you exited your position, you would lose \$40 per share.

## Why do investors go short?

Short selling can be used for speculation or hedging. Speculators use short selling to capitalize on a potential decline in a specific security or the broad market. Hedgers use the strategy to protect gains or mitigate losses in a security or portfolio.

Note that institutional investors and savvy individuals frequently engage in short selling strategies simultaneously for both speculation and hedging. Hedge funds are among the most active short sellers, and often use short positions in select stocks or sectors to hedge their long positions in other stocks.

While short selling does present investors with an opportunity to make profits in a declining or neutral market, it should only be attempted by sophisticated investors and advanced traders due to its risk of infinite losses.

See our tutorial on Short Selling and read more about The Basics of Short Selling.

RELATED FAQS
1. ### Here's What Short Sellers Must Do to Short a Stock

Learn what benefits a short seller is required to make up to the lender of shares, or long investor, when shorting a stock ... Read Answer >>
2. ### How long should you hold on to a short?

Explore the reasons for short selling and the various factors that influence how long an investor may wish to maintain a ... Read Answer >>
3. ### How does short selling help the market and investors?

Find out how short sellers provide a service to the market by acting as a check against overvalued companies and exposing ... Read Answer >>
4. ### What is the difference between a short squeeze and short covering?

Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
5. ### What Part of a Company's Float Can Be Shorted?

The quick answer: The number of shares shorted can actually exceed 50% of the float in a company. Read Answer >>
Related Articles

### Guide to Short Selling

Want to profit on declining stocks? This trading strategy does just that.

### Why You Should Never Short a Stock

Short selling a stock means you are betting on the stock decreasing in price. Before taking on this investment, you should fully understand the risks

### The Short Squeeze Method

The short squeezed strategy can be risky - but also very rewarding - for those who master it.
4. ### Difference Between Short Selling And Put Options

Short selling and put options are used to speculate on a potential decline in a security or index or hedge downside risk in a portfolio or stock.

### The 5 Most Shorted NYSE Stocks (VALE, CHK)

Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
6. Investing

### Tesla Shorts Sellers Down \$1.1 Billion As Stock Soars

Tesla short sellers face rising losses as the stock surges on unexpected good news.
7. Investing

### Why Tesla's Short Sellers Should Be Scared

Tesla shares have continued to soar amid short sellers' heavy bets that the stock will crash

### How To Protect A Short Position With Options (FB, AAPL)

Short selling can be a risky endeavor, but the inherent risk of a short position can be mitigated significantly through the use of options.
RELATED TERMS
1. ### Short Selling

Short selling is the sale of a security that is not owned by ...
2. ### Short Covering

Short covering is buying back borrowed securities in order to ...
3. ### Weak Shorts

Weak shorts refer to traders or investors who hold a short position ...

5. ### Short Squeeze

A short squeeze is when a heavily shorted security moves sharply ...
6. ### Real Estate Short Sale

In real estate, a short sale is when a homeowner in financial ...
Hot Definitions

The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
2. ### Futures Contract

An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
3. ### Yield Curve

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
4. ### Portfolio

A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
5. ### Gross Profit

Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
6. ### Diversification

Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...