Short selling means selling shares you have borrowed, in the hope of buying them back later at a lower price and keeping the difference. The most you can make is the price you sold at, if the share falls to zero; the most you can lose has no ceiling, and borrowing costs and dividends run against you for as long as the position is open.
That asymmetry, together with the cost and the timing risk, is why short selling is mainly a tool for professional investors and hedgers. For private investors it is still worth understanding: short positions move share prices, the FCA publishes data on them, and the products marketed for shorting carry specific rules.
Short selling: how a short sale works
- Borrow. Your broker arranges to borrow the shares from a lender, typically a fund or institution that lends out its holdings for a fee.
- Sell. You sell the borrowed shares in the market and receive the cash, which the broker usually holds as collateral.
- Wait, and pay. While the position is open you pay a borrowing fee, and you must pay the lender the equivalent of any dividend the company pays.
- Buy back and return. You buy the same number of shares in the market and return them to the lender. Your profit or loss is the difference between the sale and purchase prices, minus all costs.
A worked example
Suppose you borrow and sell 1,000 shares at £5 each, receiving £5,000. If the price falls to £4 and you buy back, you make £1,000 before costs. If it rises to £10, buying back costs £10,000 and you lose £5,000. At £15 you lose £10,000. The best possible outcome is a £5,000 gain, if the share goes to zero. There is no worst possible outcome. A buyer of the same shares can lose at most the £5,000 they paid. These figures are illustrative.
The costs that run against you
- Borrowing fee. Charged for as long as you hold the position. Shares that many investors want to short are harder to borrow and cost more.
- Dividends. You owe the lender an amount equal to any dividend, so a short position in a high-yielding share has a steady cost.
- Margin calls. If the price rises, your broker will ask for more collateral. If you cannot pay, the position is closed at a loss.
- Recall risk. The lender can ask for the shares back, forcing you to close earlier than you planned.
- Time. Every day the position stays open costs money, so a short seller must be right about direction and about timing.
Short squeezes
A short squeeze happens when a rising price forces short sellers to buy back shares to limit their losses or meet margin calls, and their buying pushes the price higher still. The best-documented recent case is GameStop in the United States. The US Securities and Exchange Commission’s staff found that short interest in the company peaked at 109.26% of shares outstanding on 31 December 2020, possible because the same shares can be lent more than once. GameStop closed at $347.51 on 27 January 2021, more than 1,600% above its close on 11 January, and reached an intraday high of $483.00 the next day (SEC staff report, 14 October 2021).
The SEC staff concluded that short sellers buying to cover contributed to some of the sharpest rises, but that it was “the positive sentiment, not the buying-to-cover” that sustained the weeks-long climb (SEC). The lesson for anyone short is that the price can move far beyond any valuation, for longer than a margin account can survive. Past performance is not a guide to future returns.
How private investors short in practice: CFDs and spread bets
The products marketed to private investors for profiting from a fall are mainly contracts for difference (CFDs) and spread bets, which pay out on price moves without you owning or borrowing the shares. The FCA groups CFDs, spread bets and rolling spot forex contracts that give exposure beyond the cash put up, along with some options, as “restricted speculative investments” (FCA Handbook Glossary), and applies these rules when firms sell them to retail clients (FCA Handbook, COBS 22.5):
| Underlying | Minimum margin (COBS 22.5.11R) | Exposure per £1 of margin, at most |
|---|---|---|
| Major currency pair or relevant sovereign debt | 3.33% | About £30 |
| Major stock market index, minor currency pair or gold | 5% | £20 |
| Minor stock market index or commodity other than gold | 10% | £10 |
| Individual share or any other asset | 20% | £5 |
- Margin close-out. The firm must close your positions as soon as market conditions allow if your account’s net equity falls below 50% of the margin needed to keep them open (COBS 22.5.13R).
- Negative balance protection. Your liability “is limited to the funds in that account” (COBS 22.5.17R).
- No incentives. Firms may not offer retail clients monetary or non-monetary incentives such as new-account bonuses (COBS 22.5.20R).
- Standard risk warning. Marketing must state the percentage of the provider’s own retail accounts that lost money, recalculated every three months over the previous 12 months and after all costs (COBS 22.5.6R).
That last rule means each provider publishes its own loss figure. Read it before opening an account; it is the most direct evidence available of how retail clients fare with that firm.
Tax differs between the two. HMRC says the outcomes of CFDs are charged “in almost every case” under the capital gains regime, unless profits are taxable as trading income (HMRC Capital Gains Manual, CG56100). Spread bets are structured as bets, and the capital gains legislation declares that winnings from betting are not chargeable gains (Taxation of Chargeable Gains Act 1992, section 51). Tax treatment depends on individual circumstances.
The UK disclosure regime: what the FCA publishes
Short positions in UK shares are governed by the Short Selling Regulations 2025, which replaced the assimilated EU short selling regulation and apply from 13 July 2026, alongside the FCA’s Short Selling Rules Sourcebook (FCA; FCA PS26/5, 16 April 2026). The key rules for anyone holding a net short position in a share on the FCA’s Reportable Shares List:
- Notify the FCA when the position “reaches or exceeds 0.2% of a company’s issued share capital”, and again each time it moves through a further 0.1 percentage point.
- Submit the notification by 23:59 on the working day after the obligation is triggered.
- The FCA publishes an aggregated net short position for each company every working day from 12:00, on a T+2 basis, built from positions at or above 0.2%. Individual positions are anonymised and not disclosed.
Source: FCA, notification and disclosure of net short positions. Short sales must also meet covering requirements, and the FCA can restrict or ban short selling in exceptional circumstances or after a significant fall in a share’s price (FCA). Its restrictions page states that no short selling prohibitions or restrictions are currently in place (FCA, updated 23 February 2026).
Using short data when analysing a company
For a long-only investor the aggregated figures are a research prompt, not a signal. A large aggregated short position tells you that professional investors with money at stake disagree with the market price. It does not tell you who they are, why, or whether they are hedging another position rather than betting on a fall. The useful response is to find the bear case, in the accounts, the debt, the cash flow or the competition, and test your own view against it.
Why it rarely suits private investors
The arithmetic is the argument. Gains are capped and losses are not. Costs accrue daily. A squeeze can force you out at the worst moment, and a CFD or spread bet adds borrowed exposure that magnifies all of it. A private investor who thinks a share is overvalued can simply not own it, or own less, at no cost. Our cornerstone guide on how to invest in shares covers the basics of owning shares, our guide to a diversified portfolio covers managing risk without shorting, and our guide on how to spot an investment scam covers the warning signs in high-pressure trading offers.
