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Short Selling: 5 Steps for Shorting a Stock

Short selling is when a trader borrows shares and sells them, hoping the price will fall after so they can buy them back for cheaper.

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Updated Apr 3, 2026 · 8 min read

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Nerdy takeaways ?

Short selling is when a trader borrows shares and sells them. They're hoping the price will fall after so they can buy them back for cheaper.

Shorting can help traders profit from market downturns and protect themselves from losses. It can be very risky, however.

What is short selling?

Short selling a stock is when a trader borrows shares from a broker and immediately sells them, expecting the price to fall shortly after. If it does, the trader can buy the shares back at the lower price, return them to the broker, and keep the difference, minus any loan interest, as profit.

Let's look at an example. You borrow 10 shares of a company (or an ETF), then immediately sell them for $10 each, generating $100. If the price drops to $5 per share, you could buy back all 10 shares for only $50, then return the shares to the broker. In the end, you netted $50 on the short (minus any commissions, fees and interest).

Let's look at an example. You borrow 10 shares of a company (or an ETF ), then immediately sell them for $10 each, generating $100. If the price drops to $5 per share, you could buy back all 10 shares for only $50, then return the shares to the broker. In the end, you netted $50 on the short (minus any commissions, fees and interest).

That sounds simple, but there’s more to short selling than just understanding the concept. The strategy comes with the risk of serious losses.

How to short a stock in 5 steps

1. First, you’ll need a margin account. Borrowing shares from the brokerage is effectively a margin loan. You’ll pay interest on the outstanding debt. The process for obtaining a margin account varies by brokerage. You’ll probably need to be approved for it.

1. First, you’ll need a margin account . . Borrowing shares from the brokerage is effectively a margin loan. You’ll pay interest on the outstanding debt. The process for obtaining a margin account varies by brokerage. You’ll probably need to be approved for it.

2. To make the trade, you’ll need cash or stock equity in that margin account as collateral. It needs to equal at least 50% of the short position’s value, according to Federal Reserve requirements. If this is satisfied, you’ll be able to enter a short-sell order in your brokerage account. It’s important to note here that you won’t be able to liquidate the cash you receive from the short sale.

3. To maintain the short position, you must keep enough equity in the account to serve as collateral for the loan. This must be at least 25% of the short's value, per exchange rules. Some brokerages may have a higher minimum. It depends on the riskiness of the stocks as well as the total value of the investor’s positions.

4. You can maintain the short position (meaning hold on to the borrowed shares) for as long as you need, whether that’s a few hours or a few weeks. Just remember you’re paying interest on those borrowed shares for as long as you hold them. You’ll need to maintain the margin requirements throughout the period, too.

5. If the stock price falls, you’ll close the short position by buying the amount of borrowed shares at the lower price, then return them to the brokerage. Keep in mind that to earn a profit, you’ll need to consider the amount you’ll pay in interest, commission and fees.

Paper trading allows you to practice advanced trading strategies with fake cash before you risk real money. Here are the brokerages that offer free paper trading accounts.

Paper trading allows you to practice advanced trading strategies with fake cash before you risk real money. Here are the brokerages that offer free paper trading accounts .

Why short a stock?

Investors may use a shorting strategy as a form of speculation. In other words, it’s a high-risk maneuver that could possibly yield high returns in exchange for taking on exceptional risk. Where a long-term investor may base their decision on thorough examination of the company’s financials, management and future potential, a speculator may base their decision on analysis of short-term price movements and market signals with the hope of quick profits.

Shorting a stock also can be used as a hedge. Let’s say you own shares in a company and have doubts about its near-term performance, but don’t want to sell your shares. In this instance, you could continue holding your shares for the long-term while you short the stock, buying back in at a lower price if and when the stock’s value falls. The goal here is to offset the losses of your long position.

What is short interest?

Short interest is the number of shares that are involved in open short positions on a specific stock, reported by brokerage firms on a given date. High short interest indicates negative sentiment about a stock, which may attract more short sellers

Short interest is often confused with short volume, which is a similar but distinct measurement. Short interest is the daily number of shares involved in open short positions (some of which may have been sold short in the past), while short volume is the number of shares that were sold short on that specific day. Another related concept is "short float," or the percentage of a company's shares that are being sold short (the number of shares sold short divided by the total number of shares outstanding).

Nerdy Perspective

When people ask me about short selling, one point I try to drive home is that your potential gains are finite; the best-case scenario is that the stock in question goes to zero, and you get to keep all the money you collected by selling shares short. Your potential losses, on the other hand, could be unlimited. If you have an open short sale on a stock, and that stock keeps going up in price, it'll keep getting more and more expensive to repurchase the shares needed to close your short. Even the so-called professionals sometimes burn themselves with short selling. A somewhat famous example was the 2021 meme stock frenzy, when Melvin Capital, an investment fund that was shorting GameStop, lost billions of dollars in a matter of days as GameStop shares surged in price. Short-term speculation is risky in general, but if you're set on betting against a stock, perhaps consider other ways of doing so or work with a financial advisor to gut check your strategy.

Sam Taube

NerdWallet Writer

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The risks of short selling

The biggest risk of short selling is the potential for unlimited losses.

In a traditional stock purchase, the most you can lose is the amount you paid for the shares, but the upside potential is theoretically limitless. When you short a stock, it’s the opposite — gains are maxed out at the initial price of the shorted stock if the stock price falls to $0, but your losses are theoretically limitless, because the stock price can rise indefinitely.

Let’s look at the same example as above. You borrow 10 shares and immediately sell them for $10 each, generating $100. But then the shares rally to $50 each. Remember, you’re on the hook for returning the shares to the broker at some point, meaning you may have to buy them back for $500 — a loss of $400. If the shares rally to $100 each, you’d have to buy them back for $1,000 for a loss of $900. This, in theory, can go on indefinitely, and the longer you wait for the stock price to fall again, the longer you’re paying interest on those borrowed shares.

If this happens, a short seller might receive a “margin call” and have to put up more collateral in the account to maintain the position or be forced to close it by buying back the stock.

Given the market’s long-term upward bias, many investors find it hard to short stocks and achieve consistent, profitable results. What’s more, the risk — especially if you’re not sure what you’re doing — is much higher than a buy-and-hold strategy.

» Learn more about another option in a down market: inverse ETFs

» Learn more » Learn more about another option in a down market: inverse ETFs

What is a short squeeze?

One of the biggest risks of short selling is a short squeeze, in which a sudden rise in a stock's price scares away a lot of short sellers at once.

Closing a short position means buying the stock in question — so if a group of short sellers gets spooked into closing their positions by a price increase, they will all buy the stock around the same time, which could further increase the price of the stock (and thus any remaining short sellers' losses).

This can create a feedback loop in which short sellers' losses increase exponentially in a short period of time.

What is naked short selling, and why is it illegal?

Generally speaking, investors cannot short a stock unless they can borrow the necessary shares, or prove that they can obtain the shares within the clearing time of the short sale (the day of the trade plus two business days).

But there is also naked short selling — the illegal practice of short selling shares that the investor never actually obtained. Naked short sellers collect money by selling unavailable or nonexistent shares. They hope that shares will become available before the end of the clearing window so that they can actually purchase those shares and close out their short before the initial sale is even finalized.

Naked short selling can go very wrong in a number of ways and end up harming the unsuspecting person on the other side of the trade, which is why it’s banned in the U.S. The naked short seller may fail to purchase shares within the clearing window, or they may be forced to close their short trade by a margin call before they get ahold of the shares.

That can cause a failure-to-deliver, in which the person on the other side of the trade essentially gets swindled — they pay money for shares without either receiving those shares or getting their money back.

The bottom line on short selling

To summarize, short selling is the act of betting against a stock by selling borrowed shares and then repurchasing them at a lower cost and returning them later.

It’s a relatively sophisticated (and risky) trading maneuver that requires a margin account and a keen understanding of the stock market. It may not be appropriate for stock market beginners, and some short selling maneuvers, like naked short selling, are illegal because of the risks they pose to others.

Short sellers have been accused of hurting businesses, manipulating public opinion and spreading rumors about a company or stock. It's even been implied that short sellers are almost unpatriotic for not supporting publicly traded companies.

But short sellers often bring new information to light, leading the market to a more sober assessment of a company’s prospects. That can have the effect of keeping a stock at a lower price than it would have if only cheerleaders were on the sideline. The shorts help keep unbridled enthusiasm in check, and often they uncover fraud, aggressive accounting or just poorly run companies, information that may well be hiding in a company’s filings with the Securities and Exchange Commission. These are all valuable functions in the stock market.

But short sellers often bring new information to light, leading the market to a more sober assessment of a company’s prospects. That can have the effect of keeping a stock at a lower price than it would have if only cheerleaders were on the sideline. The shorts help keep unbridled enthusiasm in check, and often they uncover fraud, aggressive accounting or just poorly run companies, information that may well be hiding in a company’s filings with the Securities and Exchange Commission . These are all valuable functions in the stock market.

» Learn more about the differences between trading and investing.

» Learn more Learn more about the differences between trading and investing .

If you’re thinking about trying it, be careful. The SEC warns that most traders lose money in their first months of trading, and many never turn a profit.

It’s a good rule of thumb to only trade with money that you can afford to lose.

It’s a good rule of thumb to only trade with money that you can afford to lose. Frequently asked questions

Is short selling the only way to bet against stocks?

Not at all — there are several different ways to profit from a decrease in stock prices, including put options, covered calls and inverse ETFs. Each of these has its own unique advantages and disadvantages compared to short selling.

Not at all — there are several different ways to profit from a decrease in stock prices, including put options , covered calls and inverse ETFs . Each of these has its own unique advantages and disadvantages compared to short selling.

Why is short selling called short selling?

The origin of the term "short" is not certain, but the general consensus is that it refers to the fact that a short seller is selling assets that they don't own, and will need to buy later to make good on the trade. They are short of those assets for the duration of the trade.

In modern finance, the word "short" is used as a general synonym for "bearish" or betting on a decline, even when someone is not actually engaged in short selling. For example, a trader might refer to buying put options on a stock as "taking a short position" on that stock. There's no actual short selling involved in that, but it's an alternative way of betting on a decline in a stock's price, so it's still sometimes called a short position.

Is now a good time to short stocks?

It may be tempting to bet against stocks amid tariff uncertainty, but short selling in anticipation of some broad market decline in the near future isn't necessarily a good idea. Many stock indexes, such as the S&P 500, are flat or slightly up for the year in spite of the tariff news. What's more, experts are wary of market timing (trying to strategically buy at lows, and sell or short sell at highs) in general. Many recommend long-term investing instead.

It may be tempting to bet against stocks amid tariff uncertainty , but short selling in anticipation of some broad market decline in the near future isn't necessarily a good idea. Many stock indexes, such as the S&P 500, are flat or slightly up for the year in spite of the tariff news. What's more, experts are wary of market timing (trying to strategically buy at lows, and sell or short sell at highs) in general. Many recommend long-term investing instead.

If you do want to short stocks, it's better to look at specific companies that are overvalued, in distress, or otherwise due for a significant downturn in the near future.

Not at all — there are several different ways to profit from a decrease in stock prices, including

put options

covered calls

and

inverse ETFs

. Each of these has its own unique advantages and disadvantages compared to short selling.

In modern finance, the word "short" is used as a general synonym for

"bearish"

or betting on a decline, even when someone is not actually engaged in short selling. For example, a trader might refer to buying put options on a stock as "taking a short position" on that stock. There's no actual short selling involved in that, but it's an alternative way of betting on a decline in a stock's price, so it's still sometimes called a short position.

It may be tempting to bet against stocks amid

tariff uncertainty

, but short selling in anticipation of some broad market decline in the near future isn't necessarily a good idea. Many stock indexes, such as the S&P 500, are flat or slightly up for the year in spite of the tariff news. What's more, experts are wary of

market timing

(trying to strategically buy at lows, and sell or short sell at highs) in general. Many recommend long-term investing instead.

If you do want to short stocks, it's better to look at specific companies that are overvalued, in distress, or otherwise due for a significant downturn in the near future.

More reading for active investors and traders

Stock Market Outlook

How to Trade Options

» Ready to get started? See our picks for the best day trading platforms.

» Ready to get started? Ready to get started? See our picks for the best day trading platforms . Neither the author nor editor held positions in the aforementioned investments at the time of publication. Neither the author nor editor held positions in the aforementioned investments at the time of publication. Neither the author nor editor held positions in the aforementioned investments at the time of publication.

Article sources

NerdWallet writers are subject matter authorities who use primary, trustworthy sources to inform their work, including peer-reviewed studies, government websites, academic research and interviews with industry experts. All content is fact-checked for accuracy, timeliness and relevance. You can learn more about NerdWallet's high standards for journalism by reading our editorial guidelines. FINRA. Short Interest – What It Is, What It Is Not. Accessed Jun 14, 2025. About the authors Chris Davis Chris Davis Chris Davis is a Managing Editor on the Investing team. He has passed the Series 65 (Uniform Investment Adviser Law Exam) and covered the stock market, investing strategies, investment accounts and cryptocurrency. His work has appeared in The Associated Press, The Washington Post, MSN, Yahoo Finance, MarketWatch, Newsday and TheStreet. See full bio. Sam Taube Sam Taube Sam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree in 2016. See full bio.

Table of Contents

Nerdy takeaways ? Nerdy takeaways ? What is short selling? What is short selling? How to short a stock in 5 steps How to short a stock in 5 steps Why short a stock? Why short a stock? What is short interest? What is short interest? The risks of short selling The risks of short selling What is a short squeeze? What is a short squeeze? What is naked short selling, and why is it illegal? What is naked short selling, and why is it illegal? The bottom line on short selling The bottom line on short selling More reading for active investors and traders More reading for active investors and traders More like this Investment Basics Investing Stocks Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana The Best-Performing Stocks in 2026 (By One-Year Returns) These are the best 21 stocks in the S&P 500 right now, based on 1-year performance. 2 By Arielle O'Shea, Chris Davis Investing in Dividend Stocks: Guide, Calculator and Top 7 Yields for April 2026 Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube What Is a Brokerage Account? Where and How to Open One Opening a brokerage account is the first step to investing. You can open one in as little as 15 minutes, but you'll need to fund it and select investments to start building out your portfolio. 2 By Arielle O'Shea, Pamela de la Fuente Best Brokerage Accounts for Online Investing and Stock Trading in 2026 Based on hours of analysis and hands-on testing, here are our picks for the best brokerage accounts based on their low fees, strong platforms, quality customer support and other factors. Chris Davis Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana The Best-Performing Stocks in 2026 (By One-Year Returns) These are the best 21 stocks in the S&P 500 right now, based on 1-year performance. 2 By Arielle O'Shea, Chris Davis Investing in Dividend Stocks: Guide, Calculator and Top 7 Yields for April 2026 Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube What Is a Brokerage Account? Where and How to Open One Opening a brokerage account is the first step to investing. You can open one in as little as 15 minutes, but you'll need to fund it and select investments to start building out your portfolio. 2 By Arielle O'Shea, Pamela de la Fuente Best Brokerage Accounts for Online Investing and Stock Trading in 2026 Based on hours of analysis and hands-on testing, here are our picks for the best brokerage accounts based on their low fees, strong platforms, quality customer support and other factors. Chris Davis Investment Calculator Use our free investment return calculator to estimate how your money can grow. Enter your planned contributions, timeline, rate of return and compounding frequency to get started. Chris Davis Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana The Best-Performing Stocks in 2026 (By One-Year Returns) These are the best 21 stocks in the S&P 500 right now, based on 1-year performance. 2 By Arielle O'Shea, Chris Davis Investing in Dividend Stocks: Guide, Calculator and Top 7 Yields for April 2026 Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube

Short Selling: 5 Steps for Shorting a Stock

You’re our first priority. Every time.

Short Selling: 5 Steps for Shorting a Stock

Nerdy takeaways ?

What is short selling?

How to short a stock in 5 steps

Why short a stock?

What is short interest?

The risks of short selling

What is a short squeeze?

What is naked short selling, and why is it illegal?

The bottom line on short selling

More reading for active investors and traders

You’re our first priority.
Every time.