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Strategy · Stock Foundations

SHORT STOCK

BearishUndefined riskIntermediate

Overview

Borrow and sell 100 shares expecting to repurchase them at a lower price. Profit from price declines; losses are theoretically unlimited if the stock rises. Requires margin, borrow availability, and willingness to pay interest — plus exposure to short squeezes.

What it does

Short selling borrows shares from your broker and immediately sells them, creating an obligation to buy them back later. If the stock falls, you buy back cheaper and pocket the difference. If it rises, you buy back more expensive and absorb the loss — with no theoretical ceiling on how high it can go. Short selling requires margin, subjects you to borrow costs, and exposes you to forced buy-ins if your broker recalls the shares.

Structure

sell 100 stock

Setup

  1. 1.Borrow shares from your broker.
  2. 2.Sell the borrowed shares at the current market price.
  3. 3.Buy them back later to close the position (buy to cover).

Max profit

Substantial but limited to the full sale proceeds. E.g., 100 AAPL at $160 → max $16,000 if stock falls to zero.

Max loss

Theoretically unlimited — stocks can rise indefinitely above the short entry price.

Breakeven

Entry price per share minus any borrow costs paid. E.g., $160.00 for AAPL.

When to use

When you're very bearish on a stock with strong fundamental or technical evidence to support a significant decline.

When to avoid

If the stock is hard to borrow, short interest is extremely high (squeeze risk), or you cannot actively manage unlimited upside risk.

Example trade

Short 100 AAPL at $175
Total Proceeds Received: $17,500
Breakeven: $175.00 (before borrow costs)

If AAPL falls to $150: P&L = ($175 - $150) × 100 = +$2,500
If AAPL falls to $0 (maximum profit): +$17,500
If AAPL rises to $200: P&L = ($175 - $200) × 100 = -$2,500
If AAPL rockets to $250 (short squeeze): Loss = -$7,500
Borrow cost on AAPL: ~0.5-2% annually = low. Borrow on GME: 50%+ annually historically.

Common mistakes

  • ×Shorting high short-interest stocks without appreciating short squeeze risk — when a squeeze begins, losses accelerate and liquidity to exit can vanish.
  • ×Not using stop-losses — unlimited upside risk means a small position can become catastrophic without defined exits.
  • ×Ignoring borrow costs on high short-interest stocks — 30-100% annual borrow costs can destroy expected returns.
  • ×Sizing too large — even a 'safe' fundamental short can gap 20% on surprise earnings or acquisition news.
  • ×Not monitoring for forced buy-ins — brokers can recall borrowed shares at any time, forcing immediate cover at market prices.

FAQ

What is a short squeeze?

A short squeeze occurs when a heavily shorted stock rises sharply, forcing short sellers to buy to cover their losses. Each forced buy pushes the price higher, triggering more short covering in a feedback loop. GME in January 2021 is the most famous example.

Are there alternatives to short stock with less risk?

Yes — long puts give you defined downside exposure with a maximum loss equal to the premium paid. Bear put spreads are even cheaper. Both avoid the unlimited upside risk and borrow complexities of short stock.

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