Short Selling Stocks: What Is It and How Does It Work?
Short selling stocks means that you aim to make a profit from a stock’s price falling rather than rising. Currently, Quartal does not offer the ability to short sell direct stocks on our trading platform, but it is important to understand how the mechanism generally works.
How Does Short Selling Work?
Simply put, short selling means you are betting against a specific stock. Usually, an investor buys shares in a company because they believe the price will rise over time. A short seller, however, believes the price will fall.
Short selling works by borrowing shares you do not own from another shareholder (typically via a broker). You immediately sell these borrowed shares on the open market. Your goal is to later buy back the exact same number of shares at a lower price than you sold them for.
When you short sell stocks, you are legally obligated to return the borrowed shares at some point. If the stock price has fallen since you sold the borrowed shares, it is now cheaper to buy them back. You return the shares to the lender and pocket the difference as profit.
Calculation Example
Peter believes Company A’s stock price will fall. He borrows 100 shares valued at 10 SEK each and sells them immediately for a total of 1,000 SEK.
Later, the stock price falls to 8 SEK. Peter decides to realize his profit. He buys back 100 shares from the market, paying only 800 SEK. He returns the 100 shares to the lender. Peter sold for 1,000 SEK and bought back for 800 SEK, securing a profit of 200 SEK (20 percent).
Opportunities and Risks
As with all types of investments, there are both advantages and serious risks to weigh.
Opportunity: Profit in a Downward Market
The primary advantage of short selling is the chance to make money even during a declining market or recession. It can also act as a hedge, helping you recover some money lost on your traditional “long” stock holdings during broader market downturns.
Risk: Infinite Potential Losses
The absolute biggest risk of short selling is that you can lose significantly more money than you initially invested. A stock’s price can only fall by 100 percent (to zero), meaning your maximum profit is capped. However, a stock’s price can theoretically rise indefinitely. If a stock you shorted moons, you are still obligated to buy it back at the massively inflated price, leading to devastating unlimited losses.
Risk: Forced Closures
The person lending you the shares retains a creditor’s right and can demand their shares back at any time. This can force you to close your short position and buy back the shares prematurely, often at a loss.
Frequently Asked Questions
Can I short sell at Quartal?
No, currently you cannot short sell actual stocks directly with us. However, you can buy derivative products linked to underlying stocks where you make money if the asset falls in value. Examples include Bear certificates, Short mini futures, or buying put options.
What is “Naked” Short Selling?
A naked short sale means you sell shares you do not own without ever having arranged to borrow them first. This practice is illegal in Sweden and strictly regulated globally.
Do I get voting rights if I borrow shares?
Yes. When you borrow shares to execute a short sale, the temporary ownership transfers to you. However, you immediately sell them to a third party on the open market, who then receives the voting rights. If the company pays dividends while you hold the short position, you must pay the full dividend amount out of your own pocket to the lender.
What is a Margin Requirement?
When you short sell stocks, brokers enforce a margin requirement to ensure you can buy the shares back. Usually, this requirement is 130 percent of the value of the shorted shares. If you sell borrowed shares for 1,000 SEK, you must keep at least 1,300 SEK in your account as locked collateral.
