Why shouldn't you short sell stocks casually? This is not a simple game of gambling; it's staking your entire fortune on human nature

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If there’s a game where winning at most doubles your money, but losing could bankrupt you, would you play it?

Going long is like taking the elevator up; the worst is returning to the ground floor. Short selling is like jumping off the roof; you have no idea where the ground is.

Behind this lies a brutal fact: short selling isn’t an investment game, but betting your fortune on human nature. Its risks far exceed your imagination and tolerance.

Key Points

• Short selling stocks is very risky; you could lose a lot of money.
• When short selling, there’s no limit to how high the stock price can rise, so your losses could be unlimited.
• Short selling requires paying interest; the longer the time, the higher the cost.
• Market behavior is often irrational; it’s hard for you to predict stock price movements.
• Short selling tests your psychology; you may not overcome human weaknesses.

Alongside the “don’t short lightly” takeaway, a more practical workflow is to improve information quality and keep positions small:

use BiyaPay’s Stock Lookup to review fundamentals and historical ranges before any trade; if your bias shifts toward trend-following longs, access the unified Trading Entry to observe depth/liquidity before scaling in; when reallocating across markets, the website outlines multi-asset conversion and compliance notes so costs and process stay transparent.

Inherent Flaw: Fatal Asymmetry Between Risk and Reward

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The first principle of investing is “only bet when you have an edge.” However, short selling, from its rule design, is doomed to be a game with extremely low odds. Its core lies in the fatal asymmetry between risk and reward.

Limited Losses in Going Long

Let’s first look at the most common investment method: going long.

When you go long on a stock, your logic is simple: you are bullish on the company’s future, buy and hold, waiting for it to rise. Let’s calculate with the simplest math:

• Your maximum profit: Theoretically unlimited. A great company could see its stock price rise tenfold, hundredfold, or more over ten or twenty years.
• Your maximum loss: Limited, at most the full principal you invested.

Suppose you buy one share at $100 per share. The worst case is the company goes bankrupt, and the stock price falls to $0. You lose that $100. Your loss cap is 100%, clear and certain.

According to the basic profit/loss formula for stock trading: Profit/Loss = (Selling Price – Buying Price) × Number of Shares, your loss is firmly locked by the purchase cost. This provides you with a solid safety net.

Unlimited Risk in Short Selling

Now, turn the lens to short selling, and you’ll immediately find the game rules have been subversively changed.

Short selling is borrowing stocks that don’t belong to you, selling them on the market, and expecting to buy them back at a lower price in the future to return them, thereby profiting from the difference. Here, the risk-reward structure is completely inverted:

• Your maximum profit: Limited. The stock price can only fall to $0 at lowest. If you sell at $100, you can earn at most that $100. Your profit cap is 100%.
• Your maximum loss: Theoretically unlimited. Because there’s no ceiling on how high the stock price can rise; it could be $200, $500, or even $5000.

This is no exaggeration. The 2021 GameStop (GME) event is a textbook case. At the time, many institutions shorted it, believing it was a company with poor fundamentals and the stock price would continue to fall. However, they bet wrong.

• Driven by retail investors, GME’s stock price surged from $17.25 to $347.51 in just a few weeks, with an intraday high once reaching $483.
• Short sellers were forced to buy back stocks at prices they never imagined to cover, and this panic buying further pushed up the stock price, forming a “short squeeze”.
• Ultimately, some short-selling institutions suffered billions of dollars in huge losses and were on the verge of bankruptcy.

This is not an isolated case. Data shows that in just one July, short sellers lost $2.5 billion on 50 highly shorted U.S. stocks like Kohl’s Corp. You think you’re making a value judgment, but in reality, you’re fighting against market irrationality and group emotions, a force powerful enough to drag you into an abyss.

The Double Erosion of Time

Short sellers not only face unlimited risk but also fight a silent enemy: time.

When you go long, as long as the company’s fundamentals are excellent, time is your friend, and compound interest creates amazing returns for you. But when you short sell, time erodes your principal and will from two aspects:

1. Ongoing Funding Costs: The stocks you borrow aren’t free. You need to pay interest to the broker, a fee called “cost-to-borrow”. This cost is calculated as an annualized percentage and fluctuates dramatically based on market conditions.
2. Loss of Opportunity Cost: Every day you wait for the stock price to fall, you’re paying this fee.

Hidden Costs of Short Selling When a stock is heavily shorted, the supply of stocks available for borrowing decreases, while demand for borrowing increases. This causes cost-to-borrow to skyrocket. In extreme cases, annualized rates can reach 50%, 100%, or even higher. This means that even if the stock price stays flat, your principal is being rapidly consumed by interest.

This mechanism determines that even if your judgment of a company is completely correct, as long as you don’t precisely time the drop, you may be forced to close early due to unbearable high interest costs, ultimately “right direction but lost money.” Time becomes the last straw that breaks you.

Triple Dilemma: Enemy to Market, Rules, and Time

When you choose to short sell, you’re not just fighting a company’s fundamentals; you’re actually declaring war on three powerful opponents at once: irrational markets, rules that can change at any time, and unpredictable futures.

Fighting Market Irrationality

You may conclude a stock is overvalued based on rigorous analysis. But you must remember an old investing adage: “The market can remain irrational longer than you can remain solvent.”

What you face isn’t calm calculation but group mania driven by “herd behavior”. People tend to imitate others’ actions, even if it seems unreasonable. History has proven this:

In 1996, then-Fed Chair Alan Greenspan issued a warning about “irrational exuberance.” But what happened next? The U.S. stock market crazily rose another four years, up over 116%, until the dot-com bubble burst in 2000.

If you heeded the warning and started shorting in 1996, even if you were ultimately proven “right,” you would have long gone bankrupt in this irrational feast. You’re betting on logic, while the market is telling emotions.

Facing Rule Disadvantages

Short selling has another brutal truth: you’re playing on a field where the rules are against you. Regulators’ primary task is usually to maintain market stability, not to help you make money.

This means that when the market crashes sharply and you’re most likely to profit, the rules may suddenly change:

• Circuit Breakers: When a stock or the entire market falls beyond a certain percentage, trading may be halted. It’s like the referee suddenly stopping the game just as you’re about to score.
• Short Sale Restrictions: Regulators may temporarily enable the “uptick rule”, restricting short sales only when the price is rising, or more extremely, directly banning short selling of specific stocks or even the entire market.

During the 2008 financial crisis, the U.S. SEC once banned short selling for nearly 800 financial services companies. You think you’ve seized the opportunity of the century, but the “referee” can bench you at any time.

Unpredictable Positive News

Your short-selling logic may be flawless, but just one unpredictable “positive” news can turn all your efforts to nothing.

This “positive” can come from anywhere. It could be the government suddenly launching a stimulus plan, saving the industry you’re shorting. Or a brand-new narrative logic that completely overturns the original valuation system. For example, some companies with poor fundamentals may surge in stock price because they’re labeled “asset play” or “tech revolution,” just like retailer Kohl’s (KSS), where the market suddenly focuses on the value of its real estate assets, completely ignoring operating performance.

Your carefully studied financial reports and data seem vulnerable in the face of these sudden positives. You’re thinking on a two-dimensional plane, while the market’s attacks may come from three-dimensional space.

Ultimate Game: Essentially Betting Your Fortune on Human Nature

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The previous analysis reveals the huge risks of short selling at the rule and market levels. But these are just the surface. The most dangerous part of short selling is that it pushes you directly into an ultimate game. You’re betting not on stock codes, but on unpredictable human nature. This is essentially a game of betting your fortune on human nature.

You’re Betting on the End of Group Madness

When you short sell, you’re fighting a powerful, invisible opponent: group psychology. You may have perfect logic and solid data, but you’re facing collective mania driven by “groupthink”.

Psychological research shows that when people see others making money from investing, they tend to imitate, believing the majority can’t be wrong. This “herd effect” rapidly pushes up asset prices, forming huge bubbles.

You think you’re doing value investing, but in reality, you’re betting on when this feast driven by greed and fantasy will end. The GameStop event in early 2021 is the most vivid lesson. At that time, a group of retail investors rallied through social media and launched “predatory trading” against institutional shorts.

They bought frantically, completely ignoring the company’s fundamentals. What you face is no longer a rational Mr. Market, but an unstoppable social movement. As a result, many heavily shorted stocks soared.

You’re betting that the group’s madness will stop, but you don’t know how long it will last or how high it will push the stock price. In this showdown, your funds are limited, while the group’s irrationality is unlimited. This is tantamount to betting your fortune on human nature, and history has proven time and again that this is the most dangerous gamble.

You’re Betting on Your Own Perfect Character

Even if you read the market right and dodge the group’s madness, you still have to face the last and hardest enemy to beat: yourself.

Short selling is a magnifying glass of human nature; it mercilessly exposes every weakness in your character. Trading psychology reveals numerous cognitive biases that lead to failure, and these biases are infinitely amplified in short selling:

• Disposition Effect: You tend to sell profitable positions too early but cling to losing positions.
• Loss Aversion: The pain of loss far exceeds the joy of equivalent gain. This will make you refuse to close when facing losses to avoid the pain of “admitting failure,” letting losses expand.
• Overconfidence Bias: You may overestimate your ability to predict the market, leading to adding to positions against the trend, ultimately causing catastrophic consequences.
• Cognitive Dissonance: When the stock price moves contrary to your judgment, you feel extreme discomfort. To alleviate this, you may selectively seek information supporting your view while ignoring danger signals.

Imagine the stock you shorted rises 50%, and your account shows huge floating losses. At this point, “loss aversion” prevents you from closing because that means turning floating losses into realized losses. You tell yourself “it will definitely fall back,” then watch it rise another 50%. Every hesitation is betting your fortune on human nature, betting you can overcome psychological flaws deeply embedded in your genes.

The fact is, almost no one has a perfect character. Under huge financial and mental pressure, 99% of people cannot maintain trading discipline long-term. Lightly choosing to short sell is actually a huge flaw in your cognitive foundation: you mistakenly think you’re the chosen one who can conquer human nature.

Professional Institutions’ “No Bet” Rule

You might think, since short selling is so dangerous, why do so many professional institutions do it?

The answer is: they’re not playing the same game as you. They have risk control systems, hedging tools, and capital strength beyond your imagination. More importantly, the top investment masters hold extreme reverence for short selling.

Take Berkshire Hathaway led by Warren Buffett and Charlie Munger, for example; they almost never publicly discuss their specific investment activities, especially short selling. Their philosophy is:

Good investment ideas are rare and valuable, like good products, easily stolen by competitors. Therefore, we usually don’t talk about our investment ideas.

This silence isn’t mystique but profound wisdom. They know the risks of short selling, so they choose “not to bet.” They understand that instead of expending energy in zero-sum games, it’s better to invest time in finding great companies.

For those professional institutions that engage in short selling, it’s not a simple “bet size.” They use complex option combinations to hedge risks or include short selling as part of a basket of “long-short strategies,” often to eliminate market volatility and earn relative returns, not to bet on a company’s bankruptcy.

Ordinary investors lack such hedging capabilities and risk management frameworks. When you charge into this battlefield barehanded, you’re engaging in the most primitive way in the most asymmetric gamble. This again proves that short selling is betting your fortune on human nature, and professional players precisely know best to avoid such gambles.

Short selling is a thorny path that very few can navigate. Its risk-reward is extremely asymmetric; you should respect it and stay away. Investment master Charlie Munger once said: “If I knew where I would die, I would never go there.” Instead of risking in downturns, focus your energy on finding great companies and enjoying growth from compound interest. Return to the essence of investing, be a friend of time, rather than continuing to bet your fortune on human nature.

FAQ

If I’m sure a company is a scam, can I short it?

You may ultimately be right, but the market’s irrational time may far exceed your imagination. During this period, the crazy rise in stock price is enough to bankrupt you. You’re betting on timing, which is almost unpredictable.

Can I use stop-loss orders to limit short-selling losses?

In violent “short squeeze” markets, the stock price may gap up instantly, and your stop-loss order cannot execute at the preset price. This will cause you to suffer huge losses far beyond expectations. Stop-loss cannot protect you from unlimited risk.

Is there a relatively “safe” short-selling method?

Professional institutions use complex option combinations for risk hedging, which is not simple short selling. They play by another set of rules. For ordinary investors, there is no truly “safe” short-selling method. You lack tools and capital to hedge risks.

Since I can’t short sell, what should I do when facing bad companies?

You should focus your energy on finding and holding great companies. Instead of risking in downturns, profit by sharing in the long-term growth of quality enterprises. This is the right path of investing and a more reliable way to create wealth.