Short Selling (Leerverkäufe)

What is short selling?

Short selling (German: Leerverkauf) is essentially a bet against a stock. It allows an investor to profit from a share that they do not actually own.

The core idea: you make money when the price falls, instead of when it rises.

How it works — step by step

1. Borrow shares
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2. Sell them immediately at the current (high) price
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3. Wait — hoping the price drops
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4. Buy the same shares back at the (now lower) price
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5. Return the borrowed shares to the lender
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6. Keep the difference as profit

Concrete example

Step	Action	Share price	Cash
Start	Borrow 10 shares	CHF 100	—
Step 1	Sell 10 shares	CHF 100	+CHF 1’000
Step 2	Price drops	CHF 60	—
Step 3	Buy back 10 shares	CHF 60	−CHF 600
Step 4	Return shares to lender	—	—
Result	Profit		+CHF 400

Who lends the shares?

Shares are typically lent by:

Institutional investors (pension funds, asset managers) who hold large long-term positions and earn a lending fee in the process.
Brokers who lend out shares held in their clients’ custody accounts (often part of the broker’s terms and conditions).

The short seller pays a borrowing fee for as long as they hold the short position. This is a cost that eats into potential profit.

Risks

Short selling is considered one of the riskiest strategies in finance:

Risk	Explanation
Unlimited loss potential	When you buy a stock, the maximum loss is 100% (price goes to zero). When you short, the price can theoretically rise infinitely — your loss has no cap.
Short squeeze	If the price rises sharply, short sellers are forced to buy back quickly to limit losses. This buying pressure pushes the price even higher, amplifying losses. Famous example: GameStop (GME) in 2021.
Borrowing costs	The longer you hold the position, the more fees accumulate — even if you are eventually right about the price direction.
Margin calls	Short positions require collateral. If the trade moves against you, the broker can demand additional funds immediately.
Timing risk	Markets can stay irrational longer than you can stay solvent. A stock can be fundamentally overvalued yet keep rising for months or years.

Short selling vs. buying (long)

	Long (buy)	Short (sell)
Profit when	Price rises	Price falls
Maximum gain	Unlimited	Limited to 100% (price → 0)
Maximum loss	100% (price → 0)	Unlimited (price → ∞)
Own the asset?	Yes	No — borrowed
Common use	Investment	Speculation, hedging

Is short selling legal?

Yes, in most markets — but it is regulated. Some regulators temporarily ban short selling during market crises to prevent panic-driven crashes (e.g. during the 2008 financial crisis and COVID-19 in 2020).

Naked short selling — selling shares short without first borrowing them — is illegal in most jurisdictions, as it can flood the market with shares that don’t actually exist.

Summary

Short selling = borrow shares → sell high → buy back low → return shares → keep the profit.

The strategy profits from falling prices, but carries unlimited downside risk and is therefore primarily used by professional traders and hedge funds.

Joel Neukom