Going Long vs. Going Short

Long: buy low → sell high

Buy first and sell after the price rises: the order is "buy → sell". Without borrowing, the worst case is the price going to zero and losing all your money.

Short: sell high → buy low

Borrow shares and sell them first, then buy them back and return them after the price falls: the order is "sell → buy". The most you can make is the difference if the price falls to 0.

Extra costs and risks of shorting

Borrowed shares carry a daily borrow fee; when the price rises your loss has no ceiling, and the broker may issue a margin call. When many shorts buy back to cut losses at once, it can set off a short squeeze.

Key takeaways

• Going long: buy first, sell later, and profit when the price rises. Without leverage, the most you can lose is what you put in.
• Going short: borrow shares and sell, then buy back cheaper and return them, profiting when the price falls. The maximum gain is the price dropping to 0.
• A short's potential loss has no theoretical limit, because the price can keep rising.
• Shorting also costs a borrow fee, and you can get caught in a short squeeze or face a margin call.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. In "Short" mode, set the exit price to $80 and play it step by step (or click the steps on the right) to see where the $2,000 profit comes from.
2. Click the "Sell at $100" step on the right: how much cash do you now have? Why isn't that money fully yours yet?
3. Drag the exit price to $150 and play to the end: how much does the short lose? Then switch to "Long" with an exit price of $50: what's the loss?
4. Look at the P&L chart at the bottom right: the long's loss line stops at −$10,000 (price goes to zero), but the short's loss line keeps falling as the price rises.

Quiz and explanations

1. You short 100 shares at $100 and later buy them back at $80 to return. What's your P&L?

Answer: +$2,000.Sell high at $100, buy low at $80: $20 per share, $2,000 in total.

2. Why is shorting considered riskier than going long?

Answer: A rising price has no ceiling, so losses are theoretically unlimited.A stock can only fall to 0, but it can keep going up.

3. You short 200 shares at $50 and pay $40 in borrow fees over the period. You then buy back at $45 to return them. Ignoring other costs, what's your net P&L?

Answer: +$960.(50 − 45) × 200 = $1,000, minus the $40 borrow fee, for a net gain of $960.

Terms in this lesson

• borrowing shares (Borrow): Before shorting, you borrow shares from your broker, and you must eventually buy back the same number to return them.
• borrow fee (Borrow Fee): What you pay the lender for borrowed shares when shorting, based on an annual rate and days borrowed; hard-to-borrow stocks can be very expensive.
• buy (Buy): Pay cash to get an asset. You become the owner, so you make money if its price rises.
• long (Long): Buy first and sell later, betting the price will rise.
• margin call (Margin Call): When your account drops below maintenance margin, you must add funds or your positions will be closed.
• short (Short): Borrow and sell first, then buy back to return it, betting the price will fall.
• short squeeze (Short Squeeze): A rising price forces many short sellers to buy back at once to stop their losses, and the rush of buying pushes the price even higher.
• unrealized P&L (Unrealized P&L): The on-paper profit or loss at today's price on shares you haven't sold yet; it moves as the price moves.