Short selling

A short seller borrows shares, usually through a broker that arranges the loan from an institutional holder, and sells them at the current price. Later the short seller buys the same number of shares in the market and returns them to the lender. If the price has fallen, the short seller keeps the difference; if it has risen, the short seller loses. While the position is open, the short seller pays a borrowing fee, must pay the lender an amount equal to any dividends, and must keep enough collateral in a margin account. The lender can also recall the shares, forcing the position to close.

Short selling carries risks that ordinary share buying does not. A share you buy can fall only to zero, but a share sold short can keep rising, so losses have no ceiling and can far exceed the money put in. A sharp rise can trigger margin calls and a short squeeze, where short sellers rushing to buy back push the price higher still. Regulators restrict the practice: most major markets ban or limit naked short selling, where shares are sold without first arranging to borrow them, and in the EU and UK significant short positions in shares must be reported to the regulator.