How to short a stock

Buy low, sell high—that sums up the approach to stocks for most investors. But if the price of a stock falls, there are still ways you can make a profit. This is known as short selling.

In this guide, we’ll show you how to short a stock, the benefits of short selling, and why shorting also comes with a high level of risk.

What is short selling?

Short selling is an advanced trading strategy that aims to benefit from falling prices. Short selling works by borrowing shares from your broker and immediately selling them on the market. Once the share price drops, you buy back the shares cheaper and return them to the broker. You then pocket the price difference.

You need to have a margin account—an account where you can borrow money from your broker—to short a stock directly. Short selling is also considered high risk. That’s because you lose money if the stock price rises, and theoretically, there’s no limit to how high a stock price can go.

Margin requirements when short selling

When you short a stock, you’ll need to have enough equity in your trading account to use as collateral for the amount you borrow from your broker. The amount of collateral you need is known as the minimum margin requirement.

So if you’re short selling 10 shares of Company XYZ at $50 per share ($500 in total) and the minimum margin requirement is 30%, you’d need at least $150 in your trading account.

The Canadian Investment Regulatory Organization (CIRO) sets minimum margin requirements, but these vary depending on the type of security being traded. Brokers can also set higher requirements if they wish. Check with your broker for details of margin requirements that apply to your account and your specific trades.

A short selling example

Let’s say you have your eyes on Company XYZ. You think its current stock price is overvalued and is set to fall in price in the near future.

Here’s how you could benefit from it by short selling its stock.

1. You borrow 10 Company XYZ shares from your broker.
2. Sell them at the current market price, $100 each, for a total of $1,000.
3. You keep the $1,000 in your account and wait for the stock price to drop.
4. The price of Company XYZ’s stock drops to $50.
5. You purchase 10 Company XYZ stocks at $50 each, a total of $500, and return them to your broker.
6. You keep the $500 profit ($1,000 – $500) minus any fees that apply.

Note: This is an ideal scenario where the price drops. If you’re wrong and the price goes to $150 per stock, you would have to pay $1,500 to buy back 10 stocks. In this case, you would lose $500 ($1,000 – $1,500 = -$500).

How to short a stock

Online brokerage accounts make it easy to short a stock. Here’s a step-by-step guide to the process of short selling.

1. Find a broker that offers short selling

Not all brokers will facilitate short selling and not all stocks are available to borrow, so shop around for the right trading platform. Make sure the broker also offers low trading commissions, an easy-to-use trading platform and access to the stocks you want to trade.

2. Open a margin account

You’ll need to trade with a margin account to short a stock. You can create an account with the broker of your choice by providing:

• Your personal information
• Your contact details
• Proof of ID
• Information about the source of your funds
• Details of your prior investing experience

3. Choose a stock

Research stocks that you believe will decrease in value. Check the company’s financial statements, market news, technical indicators and other factors, while your broker may also provide you with a searchable list of shortable stocks.

4. Place a short-sell order

Log in to your brokerage account and place a short-sell order on your chosen stock. When the order is executed, the funds from the sale will be deposited into your trading account.

5. Monitor the stock’s performance

Keep a close eye on the performance of the stock and the market as a whole. It could take less than a day for the stock to fall to the price you want, or it could take several weeks.

6. Buy back the stock

When the stock falls to your desired level, you can close your short position by buying back the shares you borrowed. Place a buy order for the same quantity of shares you sold and then return them to the lender. Remember, if the stock price has fallen, you make money—but you lose money if the price has increased.

Costs of short selling stocks

Aside from the risk of losses, short sellers have other fees and expenses to contend with.

• Margin interest. To directly short a stock, you need a margin account. This means you’re borrowing money from the broker. The broker typically charges a rate for margin loans, anywhere from 0% to 10% annually.
• Borrowing fee. Short sellers are often required to pay a fee for stocks they borrow. The cost typically depends on how hard it is to borrow a certain stock. The harder to borrow, the higher the cost.
• Dividends. If the stock you short pays dividends, you must cover the cost of those dividends to the lender during the time you shorted the stock.
• Trading commissions. Unless you use a broker that offers commission-free stock trading, you’ll need to pay trading commissions when you sell and buy stocks.

Getting the timing right when shorting a stock

Successful short selling is all about timing. Of course, accurately predicting when a stock is due to fall in value is easier said than done, and price drops, when they do happen, can occur quite quickly.

With this in mind, it’s vital to make sure your margin account and trading funds are all set up and ready to go. That way you’ll be able to take advantage of shorting opportunities as they arise. As for identifying those opportunities, that’s a matter of time, effort and analysis.

You’ll need to stay on top of market-wide trends as well as focus on the fundamentals of individual companies you’re thinking of shorting. Technical analysis can help you identify bearish patterns in the market, while you’ll need to monitor company revenue and cash flow figures, plus monitor earnings announcements, for signs a business is facing challenges that could impact its stock price.

How to find short positions on Canadian stocks

There are several steps you can take to identify shorting opportunities for Canadian stocks:

• Check which stocks investors are shorting. The CIRO releases short sale trading statistics twice each month. These reports allow you to identify which Canadian stocks investors have a negative view of, as well as those stocks that they’re starting to have a more bullish sentiment about.
• Look for overvalued sectors. In certain circumstances, stocks in some sectors that attract plenty of investor interest can become overvalued. As an example, tech stocks experienced high growth during 2020 and 2021 following the Covid market crash, but many stocks then experienced sharp declines in 2022.
• Check the company’s fundamentals. Check the company’s latest financial statements for details of revenue, cash flow and profits. Are the figures on track with predictions or do they show sluggish performance?
• Conduct technical analysis. Use technical analysis to identify bearish trends around particular stocks. This can help you decide on an entry point to short the stock once it reaches a specific price or breaks through its support level.
• Stay up to date with the latest news. From geopolitical tensions to regulatory pressure, economic figures to earnings announcements, it’s important to stay abreast of the latest developments that could affect a company’s performance. Understanding the challenges, disruptions and opportunities, both for a particular stock and a sector as a whole, will help you identify trading opportunities.

What is short interest?

Short interest tracks the number of shares of a stock that investors have short sold and are yet to buy back. It’s often expressed as a percentage and provides an insight into investor sentiment surrounding different stocks. When a stock has rising short interest, this indicates negative investor sentiment about that stock.

Short sale trading statistics and short interest figures are released twice per month and can be viewed on the Canadian Investment Regulatory Organization website.

Short selling examples

Now that you understand how to short a stock, let’s look at some recent examples of when traders could potentially have profited from short selling.

One stock that has regularly received a high percentage of short-sale trades in 2025 is Air Canada. The country’s largest airline has had a turbulent 2025, with a weaker CAD/USD exchange rate along with trade and tariff uncertainty presenting challenges.

As a result, it’s been an up-and-down year for Air Canada. And had you sold 100 Air Canada stocks at $22.34 on the first trading day of 2025, you could have bought those shares back at $18.19 by February 3—a total of $415 less than what you first sold them for.

Telecommunications giant BCE has also been trending downwards across the past couple of years. With its sometimes-criticized acquisition of Ziply Fiber, fierce competition and a challenging regulatory environment, BCE’s stock price has taken a hit.

Had you sold 100 BCE shares at the start of October 2024 at a price of $47, you could have bought them back at $37.27 each by November 21—that’s a $973 difference, minus any fees and margin interest.

Benefits of shorting a stock

• Profit from the drop. When executed correctly, short selling allows you to profit from the falling price of a stock. This is different from the conventional approach to investing of buying a stock in the hope that it will increase in value.
• Potential for large returns. If the price of the stock you short falls substantially, you could make a sizeable profit.
• Hedge against a long position. When taking a long position, you hold onto a stock with hopes that its price will rise before you sell. If it doesn’t, your short selling profits may make up for these losses.
• Minimal investment required. Because you borrow shares to sell, there’s a relatively low investment required upfront to short a stock.

Risks of short selling

• Losses can be unlimited. When you buy a stock, the maximum you can lose is the amount you invested. When you short a stock, there are theoretically no limits to how much the stock price could go up, and thus to how much you could lose. Using stop-loss orders is an easy way to help manage this risk.
• Short squeezes. If a lot of people are short selling stocks from the same company and the price unexpectedly goes up, all those short sellers will start buying back quickly to limit their losses. This in turn causes the stock to go up even more, which is known as a “short squeeze,” and it can easily become a vicious cycle that turns out very expensive for short sellers. Avoiding heavily shorted stocks can help reduce the risk of being exposed to a short squeeze.
• Additional costs. You typically have to pay a fee to borrow stocks. The harder the stock is to borrow—meaning a lot of people are already shorting it—the higher the fee.
• Margin interest. You’ll need to pay interest on the value of the shares you borrow to short a stock, so make sure to factor this extra cost into your calculations. Take note that margin interest rates can also fluctuate during your borrowing period.
• Margin calls. If the price of the stock rises and you no longer have enough equity in your account to meet the minimum margin requirement, your broker may issue a margin call. If you don’t add funds to your account to meet this requirement, the broker can close your position at a loss.

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Is short selling legal in Canada?

Yes, short selling is legal in Canadian financial markets. While some countries in Europe and Asia have temporarily banned short selling of certain assets during times of financial crisis, like in 2008 and 2020, it’s still legal in Canada.

Short selling is often misunderstood and sometimes blamed for market crashes. But its actual role in a market crash has been studied and debated, with some economists concluding that it plays an important role in the process of price discovery.

Other ways to profit from a falling stock price

As financial markets have developed, new ways of achieving the same goal as short selling have been introduced. Consider how each one might help you achieve your investing goals.

1. Buy a put option

The most popular alternative to shorting a stock is to buy a put option on it. Put options allow traders to pay a small percentage of the stock price, called a premium, for the option to sell the stock at the specified price (the strike price) at a future date. This date can range from a week or month to several months or years.

If the stock price has fallen when that date arrives, you can exercise the option and profit on the difference between the lower market price and the option strike price, minus the cost of the premium. Or you can sell back the option at the market price at any time before it expires.

If the stock price has risen, however, the option expires worthless on its expiration day and you lose the premium you paid.

2. Sell a call option

If you already own shares in a company that you think will suffer a drop in stock price, you can sell a call option that earns you the premium paid by the buyer. This offsets some or all of your losses, but it obligates you to sell your shares at the strike price on expiration day if the trade goes against you and the stock price continues to rise.

Or you can speculate and sell a call option without owning the stocks. This is called selling a naked call or naked call writing. Your broker will likely require you to have a margin account or receive special authorization to sell naked calls prior to trading. This strategy assumes that you’ll buy back the call option in the future or buy the stocks at a future market price before expiration day to exercise the option.

3. Buy an inverse ETF

Inverse ETFs aim to gain when the underlying asset price declines. They exist as a complement to regular ETFs on popular indices like the S&P 500, Dow Jones Industrial Average and Nasdaq 100, as well as market sector ETFs and leveraged ETFs.

Buying an inverse ETF achieves the same goal as shorting the ETF, but without some of the risks. It’s also worth noting that leveraged ETFs, whether they’re inverse or not, are designed for short-term trades only and should not be bought and held.

4. CFDs

Contracts for difference (CFDs) allow you to speculate on stock prices without actually owning the stocks, meaning you could bet on a decline in a stock price similarly to selling it short.

CFDs are legal in Canada but not in the US. They’re also complicated and risky, so they’re best left to experienced traders.

Bottom line

Short selling lets you earn a profit from falling stock prices. But while it offers the potential for big profits, it also comes with a high level of risk attached. Make sure you understand the risks involved and do plenty of research before attempting to short a stock.

Frequently asked questions

• Which stocks can you short sell?

  The actual stocks that you can short sell are typically determined by the brokerage and are influenced by trading volume, so stocks of larger companies are more likely to be available for shorting. Check on any stocks you're considering shorting within your brokerage account.

• What is naked short selling, and why is it illegal?

  Naked short selling is when you sell shares that you never own or borrow. This contributes to market volatility and can cause the price of the stock to plummet, so regulations are in place to prohibit naked short selling and prevent market manipulation.

• How do you know when a stock is heavily shorted?

  The market keeps track of stocks that are sold short through a measure called short interest. You can look up a stock's short interest in your brokerage account or on other market data websites. You can also check the Canadian Investment Regulatory Organization's latest short sale trading statistics and reports on the CIRO website.

• Is short selling good for beginners?

  No, short selling is not suitable for beginners. It's a complicated strategy and comes with a high level of risk, including the potential for theoretically unlimited losses. That's why it's best left to experienced investors.

• What is a short squeeze?

  A short squeeze occurs when a heavily shorted stock increases in price. This forces short sellers to close their positions in order to minimize losses, which can then drive the price of the stock even higher. A short squeeze is one of the key risks you need to be aware of if you're thinking of going short on a stock.

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Tim Falk

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Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio

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