In finance, short selling or "shorting" is the practice of selling a financial instrument that the seller borrows first (does not own), and then purchasing it later to "cover the short". Short-sellers attempt to profit from an expected decline in the price of a security, such as a stock or a bond, in contrast to the ordinary investment practice, where an investor "goes long" by purchasing a security in the hope the price will rise. Typically, the short-seller will "borrow" or "rent" the securities to be sold, and later repurchase identical securities for return to the lender. If the security price falls as expected, the short-seller profits from having sold the borrowed securities for more than he later pays for them but if the security price rises, the short seller loses by having to pay more for them than the price at which he sold them. The practice is risky in that prices may rise indefinitely, even beyond the net worth of the short seller. The act of repurchasing is known as "closing" a position.

The term "short selling" or "being short" is often also used as a blanket term for strategies that allow an investor to gain from the decline in price of a security. Those strategies include buying options known as puts. A put option consists of the right to sell an asset at a given price; thus the owner of the option benefits when the market price of the asset falls. Similarly, a short position in a futures contract, or to be short on a futures contract, means the holder of the position has an obligation to sell the underlying asset at a later date, to close out the position.

Concept

To profit from a stock price going down, short sellers can borrow a security and sell it, expecting that it will be cheaper to repurchase in the future. When the seller decides that the time is right (or when the lender recalls the shares), the seller buys back the shares in order to return them to the lender. The process generally relies on the fact that securities are fungible, so that the shares returned do not need to be the same shares as were originally borrowed.

The short seller borrows from their broker, who usually in turn has borrowed the shares from some other investor who is holding his shares long; the broker itself seldom actually purchases the shares to lend to the short seller.Understanding Short Selling - A Primer The lender of the shares does not lose the right to sell the shares.

Short selling is the opposite of "going long." The short seller takes a fundamentally negative, or "bearish" stance, intending to "sell high and buy low," to reverse the conventional adage. The act of buying back the shares which were sold short is called 'covering the short'. Day traders and hedge funds often use short selling to allow them to profit on trading in stocks which they believe are overvalued, just as traditional long investors attempt to profit on stocks which are undervalued by buying those stocks.