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What is Short Selling?

Short selling is a strategy that profits from a fall in a security's price by borrowing shares from a broker, selling them at the current price, and buying them back later at a lower price to return to the lender — the inverse of conventional 'going long'.

A short seller pays interest on the borrowed shares plus any dividends declared during the borrow. The maximum profit is 100% (if the stock goes to zero), while the maximum loss is theoretically infinite (the price can rise indefinitely). For this reason most brokers require margin, set hard borrow availability and may force a 'buy-to-cover' at any time if the borrow is recalled.

Short selling plays an essential role in price discovery and fraud detection. Hindenburg Research, Muddy Waters and Citron have exposed dozens of frauds by publishing short theses backed by detailed forensic work — Wirecard, Luckin Coffee, Adani Group. Regulators in Switzerland (FINMA) and the EU require disclosure of net short positions above 0.5% of issued capital.

Retail investors should approach short selling with extreme caution. The risk profile (unlimited downside, capped upside, carrying cost) is the inverse of long investing and demands much tighter risk control. Most retail 'shorts' use put options or inverse ETFs as bounded-loss alternatives.

Example

A trader shorts 100 shares of XYZ at CHF 50 (CHF 5,000 proceeds). Borrow cost: 2% per year. Three months later the stock falls to CHF 35; she covers at CHF 3,500. Profit: CHF 1,500 minus CHF 25 borrow cost = CHF 1,475 (29.5% return on margin in 3 months). If the stock had risen to CHF 80, the loss would have been CHF 3,000.

Related terms

Frequently asked questions

Is short selling allowed in Switzerland?+

Yes for regulated investors; FINMA requires net-short disclosure ≥0.5% of issued capital; temporary bans have applied in stress periods.

What is a short squeeze?+

Rapid price rise that forces shorts to buy back at any price, accelerating the rally — GameStop 2021 is the textbook case.

Safer alternatives?+

Put options or inverse ETFs cap downside to the premium paid or the investment amount.