How Short Selling Works

Traders commonly engage in short selling for speculation and hedging. To open a short position, a trader must have a margin account and pay interest on the value of the borrowed shares while the position is open.

The Financial Industry Regulatory Authority (FINRA), which enforces the rules and regulations governing registered brokers and broker-dealer firms in the United States, the New York Stock Exchange (NYSE), and the Federal Reserve have set minimum values for the amount that the margin account must maintain—known as the maintenance margin.

A broker handles locating shares that can be borrowed and returning them at the end of the trade. Opening and closing the trade can be done through regular trading platforms with brokers qualified to perform margin trading. To short-sell, traders commonly follow these steps:

A seller opens a short position by borrowing shares, usually from a broker-dealer, hoping to repurchase them for a profit if the price declines.
The investor then sells these borrowed shares to buyers willing to pay the market price. The trader is betting that the price will continue to decline and they can purchase the shares at a lower cost.
To close a short position, a trader repurchases the shares—hopefully at a price less than they borrowed—and returns them to the lender or broker.
Traders must account for any interest the broker charges or commissions on trades.