By Antonios Fotakis
A note before you read: This is probably the most important article in this series – not because the mechanics are complicated, but because it explains why short selling can go wrong even when your original judgment about a company turns out to be completely correct.
Most people assume short selling is risky simply because you might be wrong about a stock’s direction. That’s true, but it’s not the whole story. Short selling is riskier than buying stocks for a structural reason that has nothing to do with whether your analysis was good: the math itself is asymmetric.
The Asymmetry That Changes Everything
When you buy a stock, your downside is capped and your upside is open. The stock can only fall to €0 – meaning the most you can ever lose is 100% of what you paid. Meanwhile, the stock’s price can rise indefinitely, so your potential gain has no ceiling.
Short selling flips both halves of that equation.
| Buying a Stock | Shorting a Stock | |
|---|---|---|
| Maximum possible loss | 100% of what you paid | Unlimited – no ceiling on how high a price can rise |
| Maximum possible gain | Unlimited, over time | 100% – the stock can only fall to €0 |
| Who benefits from patience | The buyer, typically | The seller (lender), typically |
| Time pressure | Minimal, if any | Ongoing borrow fees and margin monitoring |
Notice what’s happened: the buyer’s best-case scenario (unlimited upside) is the short seller’s worst-case scenario, and the buyer’s worst-case scenario (capped at 100%) is the short seller’s best-case scenario. This isn’t a minor technical detail – it’s the single biggest reason professional risk managers treat short positions with more caution than long positions of the same size.
The Short Squeeze, Explained Simply
A short squeeze happens when a heavily-shorted stock starts rising, forcing short sellers to buy back shares to limit their losses – and that buying pressure pushes the price up even further, forcing more short sellers to buy back, in a self-reinforcing cycle.
Here’s a simplified version of how it unfolds:
| Stage | What Happens |
|---|---|
| 1. A stock is heavily shorted | Many investors have borrowed and sold shares, betting on a decline |
| 2. Unexpected good news or buying pressure appears | The stock starts rising instead of falling |
| 3. Short sellers face mounting losses | Some begin buying back shares to cut losses or meet margin calls |
| 4. That buying pushes the price up further | More short sellers are forced to do the same |
| 5. The cycle accelerates | Price can spike dramatically in a short period of time |
The most widely known modern example was the GameStop episode in early 2021, where a stock with extremely high short interest saw its price rise by an enormous multiple within days, driven substantially by short sellers being forced to buy back shares to limit their losses. Short sellers who had a fundamentally correct long-term view on the company still suffered severe losses, because the squeeze forced them out of their positions at the worst possible moment.
Being Right Isn’t Always Enough
This is the part that catches even experienced investors off guard. Imagine you short a stock because you’ve identified real, serious problems with the company’s business. You’re right – eighteen months later, the company reports terrible results and the stock is down significantly from where you shorted it.
But six months into your trade, the stock spiked 80% on unrelated hype, triggering a margin call you couldn’t meet. Your position was forcibly closed at a steep loss, long before the company’s problems became obvious to everyone else.
With owning a good stock, being right eventually tends to pay off, because you control how long you hold. With shorting, being right isn’t enough – you also have to survive the volatility along the way, on a timeline your broker partly controls.
Borrowing Costs Compound Against You
As covered in the previous article, borrowing fees are charged for as long as a short position stays open. A stock that takes two years to “prove you right” can quietly erode much of your eventual profit through accumulated borrowing costs – especially if the stock becomes increasingly hard to borrow as more people pile into the same short trade.
| Holding Period | Borrow Fee Impact (Example: 8% Annual Rate) |
|---|---|
| 1 month | Roughly 0.7% of position value |
| 6 months | Roughly 4% of position value |
| 2 years | Roughly 16% of position value |
A trade that looks profitable on paper based on the stock’s price move alone can look considerably less attractive once realistic borrowing costs are factored in over a long holding period.
Three Ways to Lose, Even With Good Analysis
| Scenario | What You Predicted | What Actually Happened | Result |
|---|---|---|---|
| Analysis wrong | Company is overvalued | Company performs well | Loss (expected) |
| Analysis right, timing wrong | Stock eventually falls | Stock spikes first, triggers margin call | Forced loss (unexpected) |
| Analysis right, costs compound | Stock eventually falls | Borrowing fees erode most of the gain | Reduced profit (unexpected) |
Two out of these three ways to lose money have nothing to do with whether your original judgment about the company was correct. This is exactly why short selling is riskier than simply not owning a stock you’re skeptical of – it’s a structural feature of the trade, not a sign of bad analysis.
Want the complete picture on managing this risk, plus legitimate hedging uses of short selling? Our full Short Selling Explained guide is coming soon.
[Get the Free Short Selling Explained Guide →]
What We Do at AF Core Global
None of our three published strategies involve shorting, precisely because of the asymmetric risk profile covered in this article:
FORTRESS – Stable ETFs and bonds for long-term, low-drama growth.
CASH FLOW – REITs and dividend stocks that pay you to hold them.
HIGH VOLTAGE – High-risk, high-upside individual stocks, always bought outright, with full transparency on entry price – and a capped, known downside.
This is precisely why short selling sits outside all three of our categories. Not because betting against a company is inherently wrong, but because the structure of the trade itself – uncapped risk, ongoing costs, and a timeline you don’t fully control – doesn’t match how we believe most people should build wealth. Not blind trust. Informed choice.
Coming Up Next in This Series
In the next article, we’ll look at how short selling is actually used by professional investors – including legitimate hedging strategies that look very different from the speculative short bets we’ve focused on so far.
Ready to keep learning? 📉 Check out our other Finance Basics guides, or see this week’s Radar Picks to see how we apply real strategy with real transparency.
Nothing in this article constitutes financial advice. This content is for educational purposes only. Short selling carries substantial risk, including potentially unlimited losses. Always do your own research and consult a qualified financial professional before making any investment decision.
