Going short
Family VII · Market & styles
Not to be confused with short position, going long.
Going short is the act of selling a financial instrument that the seller does not own, typically by borrowing it, with the intention of buying it back later at a lower price. The resulting exposure is a short position, which loses value when the price rises and gains when it falls. The term describes the action of opening that exposure, not the exposure itself.
Mechanics and margin
In a short sale, the seller borrows the instrument from a lender, sells it in the market, and later repurchases it to return to the lender. The difference between the sale price and the repurchase price, less borrowing costs and commissions, is the profit or loss.
Because the borrowed instrument must be returned, the seller posts margin. The margin requirement varies by broker, country and instrument; it is not a single universal figure. If the price rises, the position loses money and the broker may issue a margin call or force a buy-in.
Worked example
Risks and constraints
The maximum loss on a short sale is theoretically unlimited, because the price of the borrowed instrument can rise without a ceiling. Lenders may recall borrowed securities at any time, forcing the short seller to buy them back at the prevailing price. Short selling is restricted or banned in some markets and for some instruments, and rules on uptick pricing or locate requirements differ by jurisdiction.
Often confused with
- short position
- A short position is the state of being short, while going short is the act of establishing it; the visible sign is that going short appears as a completed transaction, whereas a short position appears as an ongoing holding.
- going long
- Going long is buying an instrument to profit from a price rise, whereas going short is selling borrowed stock to profit from a fall; the visible sign is the direction of the opening trade, a buy for long and a sell for short.