Definition of Short Selling
Short selling (or "shorting") is an investment strategy where an investor borrows shares of a stock and immediately sells them, with the intention of buying them back later at a lower price. The investor profits if the stock price falls, but loses money if it rises.
Unlike traditional investing where you "buy low, sell high," short selling reverses this to "sell high, buy low." This allows investors to profit from declining stock prices.
How Short Selling Works
Step 1: Borrow Shares
The investor borrows shares from a broker or securities lender. These shares typically come from institutional investors, pension funds, or other long-term holders who earn a fee for lending.
Step 2: Sell the Borrowed Shares
The investor immediately sells the borrowed shares on the open market at the current price, receiving cash from the sale.
Step 3: Wait for Price to Fall
The investor waits, hoping the stock price will decline. During this time, they pay borrowing costs (interest) to the lender.
Step 4: Buy Back ("Cover")
When the investor wants to close their position, they buy back the same number of shares on the open market. If the price has fallen, they profit from the difference. This is called "covering" the short.
Step 5: Return Shares
The purchased shares are returned to the lender, closing the position. The investor keeps any profit (or absorbs any loss) from the difference between the selling and buying prices.
Example: Profitable Short
An investor shorts 1,000 shares of XYZ at $10 per share, receiving $10,000. The stock falls to $7, and they buy back the shares for $7,000. Profit = $10,000 - $7,000 = $3,000 (minus borrowing costs).
Example: Losing Short
Same scenario, but the stock rises to $15. The investor must buy back at $15,000. Loss = $15,000 - $10,000 = $5,000 (plus borrowing costs).
Why Do Investors Short Stocks?
Profit from Overvaluation
Investors believe a stock is overvalued and expect its price to fall to reflect its true worth.
Hedge Existing Positions
Shorting can protect a portfolio against market downturns by profiting when other holdings lose value.
Arbitrage Opportunities
Traders exploit price discrepancies between related securities or markets.
Market Making
Market makers may short shares temporarily to provide liquidity and facilitate trading.
Risks of Short Selling
Warning: Short selling is considered a high-risk strategy and is typically only suitable for experienced investors who understand the potential for unlimited losses.
Unlimited Loss Potential
Unlike buying shares (where you can only lose your investment), a short position has theoretically unlimited loss potential because a stock price can rise indefinitely.
Short Squeeze Risk
If a heavily shorted stock suddenly rises, short sellers may rush to cover, driving the price even higher in a feedback loop called a "short squeeze."
Borrowing Costs
Short sellers pay ongoing interest to borrow shares. For hard-to-borrow stocks, these costs can be substantial.
Margin Calls
If the stock rises significantly, the broker may require additional collateral (margin call), potentially forcing the investor to close their position at a loss.
Understanding Short Interest
Short interest is the total number of shares that have been sold short but not yet covered. It's typically expressed as a percentage of the company's total shares on issue.
Low Short Interest (<5%)
Generally indicates bullish sentiment. Few investors are betting against the stock.
Moderate Short Interest (5-10%)
Elevated bearish sentiment. Worth monitoring for potential volatility.
High Short Interest (>10%)
Significant bearish sentiment. High squeeze potential if positive catalysts emerge.
Extreme Short Interest (>20%)
Very high risk of short squeeze. Often indicates serious concerns about the company.
ASX Short Position Reporting
In Australia, ASIC (Australian Securities and Investments Commission) requires disclosure of significant short positions. Any short position equal to or greater than 0.1% of a company's issued capital must be reported.
Data on ASX Short Data
We aggregate ASIC short position reports and provide real-time tracking of short interest across all ASX-listed stocks. Our data includes:
- • Daily short position percentages
- • Historical short interest charts
- • Short squeeze candidate screening
- • Days to cover calculations
- • Securities lending data