How to Short a Stock

When you buy a how-to short stock, you hope it will go up in value; that’s called being long on the shares. But when you short a stock, you bet against the shares going up and pocket the proceeds from the sale.

You don’t actually own the shares you sell short, but you’re able to make the sale by borrowing them from your brokerage firm. If the share price drops, you can repurchase the shares and return them to your broker to make a profit.

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There’s a ceiling on your potential profit from the short sale, but there is no theoretical limit to the losses you could suffer. That’s because the price of the stock you sold short can keep rising, and you’ll have to spend more and more on buying back the borrowed shares later. You also face a variety of additional costs (like the cost to borrow the shares, margin loan fees and interest charges) that chip away at your profits as you maintain the position.

To execute a short sale, you’ll need to have a margin account with a qualifying brokerage firm and meet its requirements for margin accounts. Then you must find a security to short and tell your broker that you believe it’s likely to decline in price. Your broker will then “locate” the shares to be shorted, and you’ll have a limited window in which to take delivery of them. That’s a regulatory requirement designed to avoid “naked shorting,” in which you try to short a stock without first taking delivery of the borrowed shares.