Short Selling
Definition
Short selling is selling a security you do not own in order to profit from a price decline: you borrow shares (typically via your prime broker from institutional lenders), sell them, and later buy them back — 'covering' — hopefully at a lower price, returning the borrowed shares and pocketing the difference.
The economics cut against the short seller in several ways: you pay a stock-borrow fee (high for 'hard-to-borrow' names), you owe the lender any dividends paid while short, and your potential loss is theoretically unlimited because a stock can rise without bound while your maximum gain is 100%. Heavily shorted stocks are also exposed to short squeezes, where a rising price forces shorts to buy back, fueling the rally.
In the US, Regulation SHO governs the mechanics, including the locate requirement (you must reasonably believe shares can be borrowed before shorting).
Why interviewers ask
'Pitch me a short' is a standard hedge-fund and equity-research question, and even IB interviews probe whether you understand the asymmetric risk profile and squeeze dynamics. Explaining borrow fees, dividend obligations, and unlimited downside cleanly shows you understand markets beyond the long-only textbook view.
Related terms
Interviews don't test definitions — they test recall under pressure.
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