Short Selling and Shorting: Between Profit Opportunities and Unlimited Risks

Short Selling is one of the most controversial trading strategies in the financial markets. On the one hand, it offers investors the opportunity to profit from falling prices and hedge their positions. On the other hand, it carries significant risks that many beginners underestimate. In this article, we explore how short selling works, present practical short sale example scenarios, and explain why this strategy is both an opportunity and a danger.

How does short-selling really work?

The concept behind short-selling is simpler than many think. Instead of the usual approach of buying low and selling high, the process works exactly the opposite:

An investor who believes a stock will fall first borrows it from their broker. Immediately afterward, they sell the borrowed stock at the current market price. Later, if the price has indeed fallen, they buy back the stock and return it to the broker. The difference between the sale price and the purchase price is their profit.

This model operates under the simple assumption: the lower the price falls, the higher the profit. But what happens if the expectation does not materialize?

A practical short sale example: The Apple strategy

Imagine you are convinced that Apple stock is overvalued. The current price is 150 euros. You decide on a short sale example in practice:

You borrow an Apple share from your broker and sell it immediately for 150 euros. Your assumption: the next iPhone will not meet expectations, and the stock price will decline. In fact, the stock falls to 140 euros within a few days. You buy back the stock, return it to the broker, and realize a profit of 10 euros per share.

But the scenario could have played out differently: instead of falling, Apple’s stock rises to 160 euros. Now, you have to buy back the stock at a higher price than you sold it for. Your loss amounts to 10 euros—and theoretically, the stock could rise much higher.

The unlimited loss risk

This is where the biggest risk of short-selling lies: Unlike buying a stock, where you can lose at most your invested amount, losses from short selling are theoretically unlimited. If the stock price rises to 200 euros, 500 euros, or even 1,000 euros, you will have to pay these higher prices to close your position. Therefore, short-selling is not suitable for inexperienced investors.

Short sales as a shield: The hedging concept

Short sales also have a defensive side. Suppose you already own an Apple stock that you want to hold long-term. In the short term, however, you fear a price decline. Instead of selling, you could short the same stock.

If the price drops to 140 euros:

• Your held stock loses 10 euros in value
• Your short sale yields you 10 euros profit
• Net result: 0 euro loss

This is the hedging principle: you use a short sale example to protect yourself against market movements. Even if the price rises, you would have achieved a similar balance with the hedge.

The hidden costs of short selling

In the previous examples, we ignored fees. In reality, these are significant:

Transaction fees: Every buy and sell costs money. In short selling, these are doubled—at sale and later repurchase.

Lending fees: The broker charges a fee for lending the stock. This depends on availability: popular stocks are cheaper to borrow, rare stocks more expensive.

Margin interest: When short selling, you usually pay interest on the borrowed stock.

Dividend adjustment: If the shorted stock pays dividends, you must pay these to the broker.

These fees can quickly erode your profits—or amplify your losses.

Advantages vs. risks at a glance

Conclusion: Who is short-selling suitable for?

Short selling is a double-edged sword. As a hedging instrument, it can potentially minimize your asset risks. However, as pure speculation on falling prices, it is highly risky and requires deep market knowledge.

A short sale example like the Apple case shows: with the right forecast, profits are possible. With a wrong assessment, significant losses threaten. Before every short selling experiment, you should not only consider the fees but also realistically assess your risk tolerance.