Glossary · UK
What is Short Selling?
A trading strategy that profits if a share price falls, by borrowing and selling shares now with the intention of buying them back more cheaply later.
Full Definition
Short selling is a trading strategy used to profit from an expected fall in a share's price, in contrast to conventional ("going long") investing, which profits when a price rises. A short seller borrows shares they do not own, usually via their broker, sells them immediately at the current market price, and aims to buy an equivalent number of shares back later at a lower price to return to the lender, keeping the difference as profit if the price has indeed fallen in the meantime; if the price rises instead, the short seller must still buy the shares back to return them, at a higher price than they sold for, resulting in a loss. A key risk that sets short selling apart from conventional investing is that potential losses are theoretically unlimited, since a share price can rise indefinitely, whereas a conventional long investor can lose at most the amount originally invested if a share price falls all the way to zero; a sharp, unexpected price rise can also force a short seller to buy back shares at a loss to close their position (sometimes contributing to a further rapid price rise known as a short squeeze). Because of the scale and open-ended nature of the risk involved, short selling is generally carried out by professional and experienced investors using specialist trading accounts rather than ordinary retail investors through a standard investment platform, ISA or SIPP, none of which typically permit short selling at all.