How do you sell shares you do not own in short selling?
It is usually easy to understand as the sequence of borrowing shares, selling them first, and then buying them back later to return them.
Table of contents
Remember this first
First, 3 things to remember
- 1General short selling is structured by selling borrowed shares first.
- 2If the price falls when you buy back to return the shares later, you make a profit; if it rises, you incur a loss.
- 3If the price rises significantly, losses can also become very large.
Borrow and sell, then buy back to return
In a standard buy, you purchase first and sell later. In short selling, you typically borrow shares, sell them first, and then buy them back later to return them. Buying back to return the shares is called short covering.
Since you must return the number of shares, you may have to buy them back at a higher price if the stock price rises. The money received from the sale is not entirely your profit.
Let's say you borrowed and sold one share for 10 dollars
The following is a simple example before deducting costs. In reality, there are borrowing costs, transaction fees, and account requirements.
| Price at which you buy back later | Results based solely on price difference |
|---|---|
| $7 | $10−$7 = $3 profit |
| $13 | $10−$13 = $3 loss |
| $25 | $10−$25 = $15 loss |
The loss can exceed the initial sale amount.
Even if you sell at $10, if you cover at $25, you lose only the difference of $15. Theoretically, stock prices can rise indefinitely, so there is no set maximum for short selling losses.
Short selling itself is not entirely illegal. Violating rules or market manipulation are separate issues. This text is for understanding news and is not an endorsement of WAPE's short selling order support.
You should not make such assumptions
“Since you shorted at $10, the maximum loss would be $10, right?”
If the price rises significantly when you cover, you could lose more than that. Additional costs may also apply.
Check what you have read.
- Do you understand the sequence of selling first and buying back later?
- Did you distinguish between the proceeds from the sale and the profit?
- Have you confirmed that losses can increase significantly?
Apply what you read to the actual screen
Try it on WAPE
Source and scope of verification
Reviewed · Version 1
- An Introduction to Short SalesNew window
SEC · Investor.gov · Verify 2026-10-20
Structure of stock lending, short selling, and buybacks. · Potential for costs/losses and the legality of short selling
This is educational material for observation and information comprehension. Hypothetical examples do not represent actual stocks or performance and do not provide buy or sell recommendations.