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Short selling definition
Short selling is the practice of selling an asset you do not own, having borrowed it, in order to profit if its price falls. You sell the borrowed asset now and aim to buy it back later at a lower price.
In the share market, short selling means borrowing shares from a lender, selling them in the market, then buying them back later to return to the lender. The profit is the gap between the higher sell price and the lower buy-back price, less borrowing costs and fees. If the price rises instead, you buy back higher and take a loss.
Short selling is one way to hold a short position, not the same thing. A short position is any exposure that profits when a price falls, and in CFD, forex, or futures trading you can take one without borrowing the underlying at all. Short selling is the specific borrow-and-sell mechanism used mostly in physical share markets. Its risk is open-ended, because a borrowed asset's price can keep rising, and a sharp rally can force a short squeeze.
Short selling Example
You borrow and sell 100 shares of a stock at USD 50 each, for USD 5,000.
The price later falls to USD 40 and you buy the 100 shares back for USD 4,000 to return them.
Your gross profit before borrowing costs, fees, and tax is:
USD 5,000 - USD 4,000 = USD 1,000
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