November 13, 2025
6 mins read
There are many ways in which investors try to make money from the stock market. Over time, different methods and tools have been developed to help them reduce risks and attract more traders. Most of these methods are designed to make trading easier and to increase profits. However, not all of them are safe.
Some of these strategies can also cause big losses if things go wrong. One such method is called short selling, or simply shorting. If you have ever wondered “What is shorting?”, this guide will explain it in the simplest way possible.
Shorting a stock means making money when the price of a stock goes down. Normally, people buy shares and hope the price rises so they can sell them later for profit. Shorting works the other way round.
Here’s how it happens:
A trader borrows shares from a broker.
They sell the borrowed shares at the current price.
They wait, hoping the price of those shares will drop.
If the price does fall, they buy back the shares at the lower price.
They then return the shares to the broker and keep the difference as profit.
For example, if you borrow shares worth ₹100 each and sell them, then later buy them back for ₹80 each, you make ₹20 profit per share.
But here’s the catch: if the stock price goes up instead of down, the trader will lose money. Since there is no limit on how high a stock price can rise, the losses from short selling can be unlimited.
To understand short selling more clearly, let’s break it into simple steps:
Borrow: The trader borrows shares from a broker.
Sell: The borrowed shares are sold immediately at the current market price.
Wait: The trader waits for the stock price to fall.
Buy Back: If the price drops, the trader buys the same number of shares at the lower price.
Return: The trader gives the shares back to the broker.
Profit or Loss: The difference between the selling price and the buying price is the trader’s gain or loss.
Example:
Borrow 10 shares at ₹50 each = worth ₹500.
Sell them for ₹500.
Later, buy them back at ₹30 each = ₹300.
Return the 10 shares to the broker.
Profit = ₹200.
If instead the price went up to ₹70 each, you would need ₹700 to buy them back. That means a loss of ₹200.
When traders short-sell, they use a few measures to understand whether a stock is overvalued or undervalued. Two important ones are:
This shows the number of shares that are being shorted compared to the total number available in the market.
A low ratio = stock may be undervalued (not many people expect it to fall).
A high ratio = stock may be overvalued (many expect it to drop).
This tells how many days it would take for all shorted shares to be bought back in the market.
A low ratio means fewer shares are shorted.
A high ratio means a lot of shares are shorted, and it could take longer to cover.
These ratios help traders guess the stock’s trend and decide whether shorting is worth the risk.
Even though short selling is risky, many traders still use it because it can be very profitable if done correctly. The main reasons are:
To make money when a stock’s price falls.
To protect (hedge) their other investments from losses.
Here are some simple examples of how short selling works in different situations:
Suppose stock ABC is priced at ₹200. You believe the price will fall after the company announces its results. You borrow 30 shares and sell them at ₹200 each = ₹6,000.
After a week, the price falls to ₹175. You buy back 30 shares for ₹5,250 and return them to the lender. Your profit = ₹750 (₹25 × 30 shares).
Imagine you short a stock at ₹200, but instead of falling, the price rises to ₹230. To return the borrowed shares, you must now buy them at the higher price. Your loss = ₹30 per share.
Suppose you already own 100 shares of a company. You think the price may fall soon. To protect yourself, you short sell the same 100 shares. If the stock price does drop, the profit from your short selling can help cover the loss from the shares you own.
Short selling is profitable only when the price of a stock falls after it has been sold. Traders borrow and sell shares at a higher price and later buy them back at a lower price. The bigger the fall, the higher the profit. Short selling works best when the market is going down or when a company is expected to perform poorly. However, success depends on the trader’s timing. If they get it right, short selling can bring quick gains without investing a lot of money.
Short selling results in losses when the stock price goes up instead of down. Because the shares are borrowed, traders must return them no matter what the price is. If the price rises, they will have to buy the shares at a higher cost than what they sold them for. The danger is that stock prices can keep rising without limit, which means the loss can also keep growing. This is why short selling is considered one of the riskiest strategies in trading.
Like any trading method, short selling has both advantages and disadvantages.
High Profit Potential: If the price falls sharply, profits can be large.
Less Capital Needed: Traders don’t need a lot of money to start, since shares are borrowed.
Use of Leverage: Borrowed money can increase returns if the trade goes right.
Hedge Against Other Holdings: Short selling can protect other investments by balancing out losses.
Unlimited Loss Potential: If the stock price rises, losses can be endless.
Margin Interest: Borrowing shares costs money in the form of interest.
Short Squeezes: If too many traders try to exit short positions at once, prices can jump even higher, causing panic.
Since short selling is so risky, traders need to be careful about a few things:
Risk Governing: Sometimes, governments or regulators ban short selling in certain sectors to avoid panic in the market.
Timing: A trader may need to wait a long time for the stock to fall, during which they must keep paying interest.
Use of Borrowed Funds: Short selling requires a margin account, which itself carries risks if the trader cannot maintain enough balance.
Short selling is not always suitable. Here are the best conditions for it:
In a Bearish Market: When prices are generally falling, shorting can give quick profits.
During Weak Market Fundamentals: If a company shows poor performance, rising costs, or weak profits, its stock may drop, making it a good shorting opportunity.
Reputation of Short Sellers: Many traders dislike short sellers because they bet against companies, which sometimes pushes prices down even further.
One of the most famous real-world examples happened during the 2008 financial crisis. Big investors like Michael Burry and hedge funds shorted mortgage-backed securities (a type of financial product linked to housing loans). They predicted the housing market would collapse, and they were right. When the market crashed, these investors made billions in profit, while many banks and regular investors lost heavily.
This shows that short selling can be extremely profitable, but it also highlights how risky and complex it is.
Short selling is a trading method that allows investors to make money when stock prices fall. While it can bring high profits, it also carries very high risks, including unlimited losses. It should not be attempted by beginners or those who do not fully understand the market.
Only experienced traders who are aware of both the advantages and dangers should try short selling. For most new investors, safer methods of trading are better choices.
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In short-selling, traders first borrow shares and then sell them when they expect the price of the shares to crash. This enables the traders to buy the shares back later at a lower price, return them from whom they borrowed and pocket the difference as profit themselves.
Short-selling comes with an unlimited loss potential and is done through borrowed funds, which in turn incur interest.
Regular selling of stocks is done by traders who have invested their funds in purchasing the stocks in the first place. Short-selling, on the other hand, is done by borrowing shares from stockbrokers.
Short-selling is legal in India and most other countries. But the chances of market regulators restricting short selling in particular sectors or the entire market are there. This is to avoid any kind of panic among market participants.
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