Short Selling: Borrowing Shares Instead of Money

I'm Andy Temte and welcome to Money Lessons! Join me every Saturday morning for bite-sized lessons that are designed to improve financial literacy around the world. Today is June 6, 2026.

Last week, we covered the quarterly rhythm that shapes life as a public company—the filings, the earnings calls, the way management's job changes once a company is owned by public shareholders. All of that assumes you own the stock and you want the price to go up. Today we look at the opposite trade: selling shares you don't own, in the hope that the price falls. The practice is called short selling, and it's one of the most misunderstood mechanics in the stock market.

A 400-year-old practice

Short selling is older than most listeners would guess. Back in our October 18, 2025 episode, we met the Dutch East India Company, or VOC—the company whose transferable shares created the world's first true stock market. One of its co-founders was a merchant named Isaac Le Maire. In 1605, Le Maire was forced off the VOC board amid accusations of misusing company funds. He spent the next several years looking for ways to get even.

In 1609, Le Maire organized a secret syndicate of merchants whose sole purpose was to drive down VOC's share price. They did this by selling shares they didn't own—agreeing to deliver shares at a future date at a price set today, and planning to buy the shares back more cheaply before delivery. This was the first documented short-selling operation in financial history. VOC's directors lobbied the Dutch authorities for help, and on February 27, 1610, the Dutch government issued an edict targeting the practice—the first stock market regulation in financial history.

The pattern has repeated itself across four centuries. Short selling appears, prices fall, authorities ban it, the ban eventually lifts, and the practice returns. That repetition tells us something. Short selling makes people uncomfortable—powerful people especially—because it's a bet against a company at a moment when everyone else is rooting for it to succeed.

How short selling actually works

Let's walk through the mechanics with a concrete example.

Suppose you believe shares of a company called Widget Corporation are overvalued at their current price of $50 per share. You think the price is going to fall. Here's how you'd profit from that view through short selling.

First, your broker borrows 100 shares of Widget Corporation from another investor who owns them—often a large institution that's willing to lend out shares for a fee. Second, you sell those borrowed shares immediately at the current market price of $50, which puts $5,000 into your account. Third, you wait. If the price falls to $40, as you predicted, you buy 100 shares back at the new lower price for $4,000. Fourth, you return those 100 shares to the lender, closing out the loan. You keep the difference—$1,000—as your profit.

Two costs reduce that profit. The broker charges a borrow fee for the privilege of borrowing the shares, paid for as long as the loan is open. And if the company pays a dividend while you have the borrow open, you owe that dividend to the lender, because the lender is the one who would have received it otherwise.

There is also a timing risk that has no parallel when you buy a stock outright. The investor who lent you the shares can demand them back at any time. If your broker can't find another lender to replace the borrow, you'll be forced to buy shares in the market and return them immediately—whether the price is favorable or not. The trade is on someone else's clock as much as your own.

The risk that makes short selling different

Here is the part that every short seller must understand before placing the trade. When you buy a stock, the worst thing that can happen is the company fails and the stock goes to zero. You lose what you paid—painful, but bounded. The most you can lose is one hundred percent of your investment.

When you short a stock, the math runs in the opposite direction. You lose money when the price rises. And there is no ceiling on how high a stock price can rise.

Go back to our Widget Corporation example. You shorted 100 shares at $50, collecting $5,000. Now imagine you were wrong, and the stock rises to $200. To close your position, you have to buy 100 shares back—but those shares now cost $20,000. You opened the trade for $5,000 in proceeds and you have to spend $20,000 to close it. You've lost $15,000—three times what you originally received. And if the price keeps climbing, your losses keep climbing with it.

This is what financial professionals call asymmetric risk. Long positions cap losses at one hundred percent. Short positions don't cap losses at all.

The short squeeze

When too many investors are short the same stock and the price starts rising sharply, something dangerous can happen. Short sellers facing growing losses are forced to buy shares to close their positions before the losses get worse. That buying drives the price higher, which forces more short sellers to cover, which drives the price higher still. This self-reinforcing feedback loop is called a short squeeze.

The most spectacular short squeeze in modern history happened in October 2008. The German automaker Porsche had been quietly accumulating an ownership position in Volkswagen for years. On Sunday, October 26, 2008, Porsche announced that it held a combined position equivalent to roughly 74 percent of Volkswagen's shares—part of it was stock owned outright, part of it was derivative contracts tied to Volkswagen's share price. Between Porsche's position and the 20 percent stake held by the German state of Lower Saxony, only about six percent of Volkswagen's shares were available for trading. Meanwhile, short sellers had sold short roughly twelve percent of the company. There were not enough shares in the market for the short sellers to buy back.

The result was extraordinary. Volkswagen's share price moved from around two hundred euros on Friday, October 24, to over one thousand euros on Tuesday, October 28. For a few hours, Volkswagen was briefly the most valuable listed company in the world by market capitalization, overtaking ExxonMobil. Hedge funds that had been short Volkswagen lost an estimated thirty billion dollars collectively, much of it in a matter of days.

What this means for you

Almost no retail investor should short stocks, and the asymmetric risk is the central reason. When you believe a stock is undervalued and buy it, you can hold the position as long as you want. There are no daily costs draining your return, no one can force you to sell, and the most you can lose is what you paid. When you short a stock you believe is overvalued, none of that is true. Borrow fees accumulate daily. The lender can recall the shares at any time and force you to close at an inconvenient moment. And your potential losses have no ceiling.

There's a well-worn saying in the markets: markets can stay irrational longer than you can stay solvent. The short sellers who bet against Volkswagen in October 2008 were probably right about the fundamentals. They lost anyway. Being right about the destination doesn't help if the trip bankrupts you along the way.

If you ever find yourself convinced a particular stock is going to fall, the cleanest response for most investors is the simplest one: don't own it.

Looking ahead

Short selling sits at the intersection of mechanics and information. Regulators write rules around it, exchanges monitor it, and information about who is short what stock is treated as material. That's because short sellers often act on information that other market participants don't have—and the question of who knows what, and when, is fundamental to how markets work. Next week we'll explore information asymmetry: why some market participants know things that others don't, and how the rules of the market try to keep that gap from getting too wide.

Until next week... Grace. Dignity. Compassion.