Oct 17, 2026 · 11 min
Short sellers profit by reversing the usual stock trade
How Short Selling Works (Short Selling for Beginners)
Understanding the borrow-sell-buyback sequence clarifies how traders can seek gains when stock prices decline.
- 1Short selling reverses traditional investing by selling borrowed shares before buying them back.
- 2The strategy depends on selling at a higher price and repurchasing at a lower one.
- 3David Capablanca presents short selling as a distinct approach for traders focused on declining stocks.
Don't miss
The episode’s clearest teaching moment is the reversal of the familiar trade: sell borrowed shares first, then buy them back cheaper.
The brief
David Capablanca introduces short selling as the opposite of traditional stock investing, where the trade begins by selling borrowed shares rather than owned ones.
The central sequence is straightforward but counterintuitive: borrow shares, sell them at a higher price, then buy them back at a lower price.
That reversal creates a way to seek profit from declining stock prices, making short selling an alternative to the conventional long position.
Capablanca, who identifies himself as a professional short seller and author, explains the strategy at a beginner-friendly level in Short Selling Master.
What was said on this episode
18 statements · 7 positive · 9 negative · 2 neutral
Short selling involves selling borrowed shares before buying them back at a lower price.
“short selling is sell high buy low first you sell high and then you buy back low”
Listen at 0:14
A short position opened at $150 and covered at $100 produces a $50 profit.
“you shorted it at 150 and you covered it at 100 and that means you take that 50 profit”
Listen at 1:23
Borrowing shares for short selling incurs a locate fee.
“The broker then gives you those shares to short at a cost. There's a fee to that. That's a locate fee.”
Listen at 2:15
David specializes in day trading volatility.
“I specialize in day trading volatility”
Listen at 2:53
Small-cap stocks are those with market capitalization of $250 million or less.
“I classify them as any stock with a $250 million market cap or less.”
Listen at 3:28
Increased supply combined with lower demand produces downward price trends.
“When supply increases and there's less demand, this is a recipe for a downward trend.”
Listen at 3:49
Short sellers should exit trades when their thesis is wrong.
“When we're wrong, we accept that we're wrong and we cut the trade.”
Listen at 4:30
Claims of 100% winning rates for a trading strategy are red flags.
“anyone that just says that you win 100% with this strategy, that's a huge red flag”
Listen at 4:39
Easy-to-borrow stocks generally have no short-selling fees.
“Easy to borrow stocks. There's no fees to short those.”
Listen at 5:36
Hard-to-borrow stocks incur short-selling fees.
“Hard to borrow means that there's going to be some fees to it.”
Listen at 6:04
Holding short positions overnight incurs an overnight fee.
“With short selling, there's also an overnight fee, fee for holding it overnight.”
Listen at 6:34
Traders should avoid holding hard-to-borrow stocks overnight.
“you want to avoid holding them overnight”
Listen at 7:06
Short squeezes are the biggest risk of holding short positions overnight.
“the biggest risk is the short squeeze risk”
Listen at 8:10
GameStop experienced a very large short squeeze.
“GameStop had a huge Huge squeeze.”
Listen at 8:15
Traders should avoid Chinese stocks and nano-float stocks.
“It's the Chinese stocks and the nano floats. So those two specific categories have to be avoided at all costs.”
Listen at 9:04
Maximum trading losses should be limited to amounts recoverable within two or three days.
“you have to set your max loss to what you can recover. within two to three days.”
Listen at 9:13
Small-cap companies are highly volatile and provide short-selling opportunities.
“The small cap companies are very volatile, provided a lot of opportunity on the short side.”
Listen at 9:39
Short selling can be financially rewarding and worthwhile as a career.
“There's a lot of money to be made. It's absolutely worth it.”
Listen at 10:29
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
Books & mentions
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