Bill White Says: An Introduction to Short Selling
Investing in the stock market typically involves buying shares, holding onto them for a period, sometimes collecting dividends, and ultimately selling at a higher price to generate a return on investment (RoI). This is the standard approach that most investors follow. But what if you could sell a stock before you even own it?
That’s where short selling comes in.
What is Short Selling?
Short selling is a strategy used by traders and speculators who anticipate a stock's price will decline. Instead of buying shares upfront, a short seller borrows shares from a broker and sells them at the current market price. Later, when the stock price drops, the trader buys back the shares at a lower price, returns them to the lender, and pockets the difference as profit.
For example:
You believe XYZ Corp. is overvalued and will drop in price.
You sell 100 shares at $10 each, even though you don’t own them yet.
The price drops to $8 per share, as you predicted.
You buy back the 100 shares at $8 (covering your position).
You make a $2 per share profit ($200 total) minus fees.
The Risks and Costs of Short Selling
Short selling can be a profitable speculation strategy, but it comes with significant risks. Unlike buying stocks, where your maximum loss is the amount you invested, short selling has potentially unlimited losses because a stock’s price can rise indefinitely.
If, instead of falling, the stock rises to $15, you’ll have to buy back at a loss—potentially wiping out your capital. This is why short selling requires sufficient funds in your trading account to cover potential losses.
Most brokers charge fees for short selling, including borrowing fees and interest on the borrowed shares. Choosing the right platform is essential. I use Forex.com for short selling because of its low fees and easy execution, but this isn’t a strategy for everyone.
Who Should Consider Short Selling?
Short selling is not for casual investors or those trading with their last $100. It requires:
✅ Market knowledge and research – Guessing won’t cut it.
✅ Risk management skills – You need to set stop-losses.
✅ Sufficient capital – Losses can spiral quickly.
✅ Emotional discipline – This is not for the fainthearted.
For experienced traders, short selling can be a powerful tool to profit from market downturns. But for the inexperienced, it can lead to devastating losses.
Bill White Says…
"Not for the fainthearted, short selling is a way to benefit financially from the decline in a stock's value, but beware. It's not for everyone!"