How Short Selling Works on Wall Street: The Truth Behind the Profits
The Secret Weapon of Wall Street’s Smartest Traders
While most retail investors focus on buying low and selling high, Wall Street’s elite often profit from the exact opposite: betting that a stock will fall. Short selling—once an obscure strategy—is now a vital part of modern trading, playing a key role in price discovery, market liquidity, and even corporate accountability. But how does it work, and what risks does it carry?
Borrow, Sell, Wait, Buy Back — and Hopefully Profit
Short selling begins when a trader borrows shares of a stock, usually through a brokerage, with the intention of selling them immediately at the current market price. For example, if a hedge fund expects the stock of electric vehicle company Nikola Corporation (NKLA)—listed on the NASDAQ—to drop from $8 to $4, they may borrow 10,000 shares and sell them for $80,000. If the price drops as expected, they can repurchase the shares for $40,000 and return them, locking in a $40,000 gain.
Short selling is common in volatile sectors like biotechnology, electric vehicles, and tech. Popular short targets often include high-flying but speculative names such as GameStop Corp. (GME) and AMC Entertainment Holdings (AMC), both listed on the New York Stock Exchange (NYSE), or Beyond Meat Inc. (BYND) on NASDAQ.
What’s Fueling the Demand for Shorts in 2025?
Recent earnings misses, regulatory crackdowns, and inflated valuations are turning many names into shorting candidates. Companies like Rivian Automotive Inc. (RIVN) and Lucid Group Inc. (LCID)—both in the EV sector and listed on NASDAQ—have become common targets as investors question their paths to profitability. Meanwhile, pharma names like Moderna Inc. (MRNA) and Novavax Inc. (NVAX) are under scrutiny as pandemic revenues dry up.
The mechanics of borrowing shares rely on the margin system. Brokerages locate shares—often from long-term investors or mutual funds—and lend them out for a fee. This generates interest revenue for the brokerage and allows the short seller to bet against the stock.
But the Risks Can Be Catastrophic
Short selling carries theoretically unlimited risk. If the price of the borrowed stock rises instead of falling, losses can spiral. This is what happened during the infamous GameStop (GME) short squeeze in early 2021, where retail traders banded together via Reddit to drive prices up and force hedge funds to cover at massive losses.
To protect themselves, most traders place stop-loss orders or hedge their positions using options. Still, if a stock like Tesla Inc. (TSLA)—NASDAQ’s megacap giant—unexpectedly jumps due to a positive earnings surprise, short sellers can lose millions in minutes.
Why Short Selling Matters
Despite criticism, short selling is not inherently negative. It helps identify overvalued companies, exposes fraud (as seen in the Luckin Coffee Inc. scandal), and adds depth to the market. The SEC monitors this activity closely, especially during periods of high volatility, but regulators generally accept its role as healthy and necessary.
Understanding how short selling works gives retail investors a fuller picture of what moves the market. In a time where stocks are driven not just by fundamentals but also by sentiment and algorithms, knowing what the smart money is doing on the short side can be a major edge.