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Short selling

Short selling is borrowing a stock you do not own, selling it, and aiming to profit by buying it back cheaper after the price falls. In a short sale the investor borrows a stock expected to fall from the broker, sells it in the market and later buys it back to close the loan.
Contents
  1. 1.Key points
  2. 2.Formula / calculation
  3. 3.Interpretation
  4. 4.Pitfalls
  5. 5.Frequently asked questions

Key points

  • The difference (minus borrowing cost) is the profit or loss.
  • Growing short positions can show that bearish expectations are spreading; but heavy short interest can produce a sharp rally through forced buybacks (a short squeeze) when the price rises.
  • upside loss is unlimited and margin calls can follow.

Formula / calculation

Profit/Loss = (Sale price − Repurchase price) × Lots − Borrowing cost − Commission. The loss is theoretically unlimited because there is no ceiling on how high the price can rise.

Interpretation

On Borsa Istanbul it is allowed only in certain stocks and under specific rules.

Growing short positions can show that bearish expectations are spreading; but heavy short interest can produce a sharp rally through forced buybacks (a short squeeze) when the price rises. The CMB may temporarily ban short selling during market declines.

Pitfalls

upside loss is unlimited and margin calls can follow. Borrowing costs and the obligation to pay dividends reduce returns. It is a high-risk strategy for beginners.

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Frequently asked questions

Short selling is borrowing a stock you do not own, selling it, and aiming to profit by buying it back cheaper after the price falls.

Profit/Loss = (Sale price − Repurchase price) × Lots − Borrowing cost − Commission. The loss is theoretically unlimited because there is no ceiling on how high the price can rise.

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