Most investors make money when share prices rise. Short sellers make money when they fall. Here’s how short selling works, and why it’s one of the most controversial practices on the share market.
Normally, investors buy a share hoping its price will go up. A short seller does the opposite. They bet that the price will fall.
Here’s how it works. An investor borrows shares from another investor, usually a large fund, through a broker, and pays a fee for the loan. They sell those borrowed shares straight away at today’s price.
Later, they buy the same number of shares back on the market and return them to the lender. If the price has fallen in the meantime, they buy them back for less than they sold them for, and keep the difference as profit.
For example, if a short seller sells borrowed shares at $10 and buys them back at $7, they make $3 a share, minus fees. If the price rises to $13 instead, they lose $3 a share.
Why it’s risky
When you buy a share, the most you can lose is what you paid, because a price can’t fall below zero. With short selling, there’s no limit to how high a price can rise, so in theory the losses are unlimited.
That risk can create a “short squeeze”. If a heavily shorted share starts rising, short sellers rush to buy it back to limit their losses, which pushes the price even higher. The most famous example came in 2021, when small investors coordinating online drove up shares in U.S. video game retailer GameStop, inflicting heavy losses on hedge funds that had bet against it.
Why it exists, and the rules
Supporters argue short selling makes markets work better. It helps set accurate prices, adds trading activity and can expose companies that are overvalued or hiding problems. Some short sellers publish research accusing companies of fraud or poor accounting.
Companies targeted by short sellers often see it differently, arguing their attacks can drive down share prices unfairly.
In Australia, short selling is regulated by ASIC. Selling shares without first arranging to borrow them, known as naked short selling, is generally banned. Large short positions must be reported, and ASIC publishes daily data showing the proportion of each company’s shares that has been sold short.
During market crises, regulators sometimes temporarily ban short selling, as Australia did during the global financial crisis in 2008.
Most everyday investors don’t short sell directly, but some exchange-traded funds offer a way to profit when the market falls. These products are complex and carry high risks.
