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Short Selling and Margin

Short selling

Borrow shares, sell them, buy them back later, return them. Profit if the price fell.

The mechanics matter. You must locate a borrow before selling short, paying a borrow fee to the lender. For most large stocks this is trivial and cheap. For heavily shorted or small-cap names it can be expensive, sometimes tens of percent annualised, and the borrow can be recalled at any time, forcing you to close the position at whatever price is available.

You also owe the lender any dividends paid while you are short.

The asymmetry

Long: maximum loss=100%Short: maximum loss=unbounded\text{Long: maximum loss} = 100\% \qquad \text{Short: maximum loss} = \text{unbounded}

A stock you buy can only fall to zero. A stock you short can rise indefinitely, and your loss grows with it.

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