Short Selling

What is Short Selling? — Definition

Short selling is a way to profit from a declining stock. Here's how it works: You borrow shares from your broker, immediately sell them at the current price, and hope to buy them back later at a lower price. The difference (minus borrowing costs) is your profit. If the stock rises instead, your losses can be theoretically unlimited.

Short selling is controversial but serves important market functions: it provides liquidity, incorporates negative information into prices faster, and can expose fraud (as Hindenburg Research and Muddy Waters do). The risk of a 'short squeeze' — when a heavily shorted stock rises rapidly, forcing short sellers to buy back at a loss — can be extreme.

Example

Michael Burry's famous short against the housing market via credit default swaps in 2007–2008 earned his fund hundreds of millions. GameStop's 2021 short squeeze showed the other side: short sellers collectively lost over $6 billion in January 2021 as retail investors coordinated buying on Reddit.

Short positions are NOT disclosed in 13F filings, which is one important limitation of BMInsider's Smart Money Tracker — you see what managers own long, but not what they're betting against.