Great Depression Lessons for the April Stock Market Crash: Turning the 2025 Tariff Crisis into Opportunity
Historical parallels and strategies for navigating the current tariff-induced market downturn with lessons from previous economic crises.
What is Short Selling? Shorting & Going Short in Trading Explained (2025)
Table of Contents
- Introduction
- What is Short Selling?
- Going Long vs Going Short
- 3 Reasons Traders Use Short Selling
- How Short Selling Works: Step-by-Step
- 4 Critical Concepts Before Short Selling
- Advanced Short Selling Strategies
- Frequently Asked Questions
- Test Your Knowledge: Short Selling Quiz
- Conclusion: Is Short Selling Right for You?
Key Takeaways
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Short selling is the practice of borrowing an asset, selling it immediately, and buying it back later at a hopefully lower price to profit when markets fall.
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Going short is the opposite of going long – instead of "buy low, sell high," you "sell high, buy low," which allows you to potentially profit in down markets.
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The three main reasons traders use short selling are: to profit in down markets, to hedge existing positions, and to bet against overvalued assets.
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Short selling carries unique risks including theoretically unlimited losses, margin calls, borrowing costs, and vulnerability to short squeezes.
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Alternative ways to short sell include using put options (which limit your risk to the premium paid), inverse ETFs like SH and PSQ, futures contracts, and CFDs.
As markets plummet in what some are calling "Black Monday" (April 7, 2025), investors worldwide are watching their portfolios shrink. With the S&P 500 futures down 2.5%, Dow dropping 2.1%, Nasdaq sliding 3.1%, and global markets in freefall—Japan's Nikkei down 8%, Australia's ASX 200 dropping over 6%—many are wondering: is there a way to profit during this tariff-induced crash?
During the 2008 financial crisis, Michael Burr made over $100 million by betting against the housing market. But how did he actually do it? The process is called short selling or going short, and amid today's market turbulence, it's becoming an increasingly relevant strategy for traders looking to navigate the tariff crash that began after markets peaked on February 19, 2025.
This comprehensive guide covers everything you need to know about short selling: what it is, how it works, the different strategies you can use, and the important concepts you must understand before attempting to short sell any asset.
What is Short Selling? In super simple terms, short selling is betting that an asset’s price will go down.
What is Short Selling? (Simple Explanation for Beginners)
In very simple terms, short selling is betting that an asset's price will go down. Whether that asset is a stock, cryptocurrency, or another financial instrument, the basic concept remains the same.
How does this work in practice? The process involves:
Borrowing an asset you don't own
Selling that borrowed asset immediately at the current market price
Buying it back later (hopefully at a lower price)
Returning the borrowed asset to the lender
The key principle is simple: if the price drops between when you sell and when you buy back, you profit from the difference. However, if the price rises instead, you lose money.
Going Long vs Going Short
To understand short selling fully, it helps to compare it with normal trading:
Going Long (Normal Trading):
Buy low, sell high
This is what most people think of as traditional trading
You own the asset and profit when its price increases
Your potential loss is limited to your initial investment
Your potential profit is theoretically unlimited
Going Short (Short Selling):
Sell high, buy low
The exact opposite of normal trading
You borrow and sell an asset, hoping to buy it back cheaper
Your potential profit is limited (the asset can only fall to zero)
Your potential loss is theoretically unlimited (the asset can rise indefinitely)
Short selling reverses the traditional buy-low-sell-high equation, allowing traders to potentially profit from declining markets rather than just rising ones.
3 Reasons Traders Use Short Selling (Profit & Protection)
3 Reasons Traders Use Short Selling
01
Profit in Down Markets
Make money when prices fall during bear markets or corrections instead of watching your portfolio lose value. Particularly relevant during the current tariff-induced market crash where assets are experiencing significant downward pressure.
02
Hedging (Portfolio Protection)
Use short positions as insurance for your existing long-term investments. For example, if you own tech stocks but fear sector declines due to tariffs, shorting a tech index ETF can offset potential losses in your portfolio.
03
Market Correction (Betting Against Overvalued Assets)
Profit from overvalued assets returning to their true value. If your research indicates a company's stock price is unsustainable—particularly those vulnerable to tariff impacts—short selling allows you to capitalize when the market eventually corrects.
There are several strategic reasons why traders incorporate short selling into their toolkit:
1. Profit in Down Markets
The most obvious reason is to make money when prices are falling. In bear markets or during corrections, short selling allows you to capitalize on downward price movements rather than sitting on the sidelines or watching your portfolio lose value.
This is particularly relevant in today's market conditions, where many assets are experiencing significant volatility and downward pressure.
2. Hedging (Portfolio Protection)
Short selling can serve as insurance for your existing long positions. If you have a long-term portfolio but are concerned about potential near-term market declines, you can short sell to offset potential losses.
For example, if you own tech stocks but fear a sector pullback, you might short sell a tech index ETF to hedge your exposure. This way, if the sector drops, your gains from the short position help offset losses in your long-term holdings.
3. Market Correction (Betting Against Overvalued Assets)
Some traders use short selling as a way to bet against assets they believe are fundamentally overvalued. If you've done your research and believe a company's stock price doesn't reflect its true value, short selling allows you to potentially profit when the market eventually corrects.
For instance, if you believe Tesla is trading at an unsustainable valuation, you might short the stock in anticipation of a correction.
How Short Selling Works: $200 Profit Example Step-by-Step
Let's walk through a practical example to illustrate exactly how short selling works:
Scenario: You want to short 100 shares of a stock currently trading at $10 per share.
Step 1: Borrow the Shares
You borrow 100 shares from your broker (who typically borrows them from another investor)
At this point, you don't own any shares but have the obligation to return them later
Step 2: Sell the Borrowed Shares
You immediately sell the 100 borrowed shares at the current market price of $10 each
This generates $1,000 in proceeds that go into your account ($10 × 100 shares)
Step 3: Wait for the Price to (Hopefully) Drop
Now you wait, hoping the stock price will decline so you can buy back the shares at a lower price
Step 4A: If the Price Drops (Profit Scenario)
Let's say the stock price falls to $8 per share
You buy back the 100 shares for $800 ($8 × 100 shares)
You return the 100 borrowed shares to your broker
Your profit is $200 ($1,000 initial proceeds - $800 repurchase cost)
Step 4B: If the Price Rises (Loss Scenario)
But what if the stock price rises to $12 instead?
You'd need to buy back the 100 shares for $1,200 ($12 × 100 shares)
You return the 100 borrowed shares to your broker
Your loss is $200 ($1,200 repurchase cost - $1,000 initial proceeds)
This example demonstrates both the profit potential and risk of short selling. While you can profit when prices fall, you can also lose money if prices rise instead.
4 Critical Concepts You Must Know Before Short Selling
Before you start short selling, you need to understand several important concepts:
1. Margin Account Requirement
To short sell, you need a margin account with your broker. A margin account allows you to borrow funds or securities from your broker, but it comes with specific requirements:
You'll need to maintain a minimum account balance
You may need to pass a broker's screening process
Different brokers have different margin requirements
2. Borrowing Costs
When you borrow shares to short sell, you typically pay interest on the borrowed shares. This borrowing cost is essentially the "price" you pay for the privilege of borrowing the securities. The rate varies based on:
How difficult the shares are to borrow
The broker's policies
The current interest rate environment
For heavily shorted stocks, these borrowing costs can be substantial and eat into your potential profits.
3. Margin Calls
If the stock price rises significantly against your short position, your broker may issue a "margin call," requiring you to either:
Deposit additional funds into your account, or
Close your position (buy back the shares) at a loss
Margin calls occur when your account equity falls below the maintenance margin requirement. They represent one of the most significant risks of short selling, as they can force you to realize losses at possibly the worst time.
4. Short Squeeze Risk
A "short squeeze" occurs when a heavily shorted stock's price rises sharply, forcing short sellers to buy back shares to limit their losses. This buying pressure drives the price even higher, triggering more short sellers to cover their positions, creating a self-reinforcing cycle of upward price movement.
Famous short squeezes like those involving GameStop (GME) in 2021 demonstrate how dramatically prices can spike, causing catastrophic losses for short sellers caught in the squeeze.
Short Selling in the 2025 Tariff Crash: Timely Strategies
As Trump's administration doubles down on tariff policies despite warnings of a 60% recession risk from major U.S. banks, traders are quickly pivoting to bearish strategies. Fed Chair Powell's wait-and-see stance has left markets without an immediate safety net, creating potential opportunities for short sellers.
Most Vulnerable Sectors to Target
Certain sectors are particularly exposed to the current tariff tensions:
Import-Dependent Retailers - Companies that rely heavily on imported goods from targeted countries are facing margin pressure as input costs rise.
Global Manufacturing - Multinational manufacturers with complex international supply chains are struggling with disrupted operations and higher costs.
Luxury Goods - High-end products often targeted by retaliatory tariffs are seeing reduced demand as prices increase.
Technology Hardware - Tech companies dependent on global component sourcing are experiencing supply chain disruptions and increased production costs.
European Exporters - With the EU coordinating retaliatory responses, companies heavily reliant on U.S.-EU trade face significant headwinds.
Advanced Short Selling Strategies for the Tariff Crisis
Advanced Short Selling Strategies for the Tariff Crisis
Put Options
Put options give you the right (not obligation) to sell an asset at a specified price within a specific time period. Their value increases when the underlying asset's price falls, making them ideal for high-volatility periods like the current tariff crash.
Key Benefits During Tariff Uncertainty:
- Limited risk: Maximum loss is the premium paid, protecting from sudden policy reversals
- Leverage: More exposure per dollar than direct short selling
- No margin account: Can be purchased in standard brokerage accounts
- No borrowing costs: No need to borrow the underlying asset
- Targeted exposure: Precisely target companies vulnerable to tariffs
Inverse or Short ETFs
With broad market indices plummeting, inverse ETFs offer straightforward exposure to continued declines. These exchange-traded funds move in the opposite direction of a market index or sector.
Timely Examples for the Tariff Crash:
- SH ProShares Short S&P 500 - rises when the S&P 500 falls
- PSQ ProShares Short QQQ - rises when the NASDAQ falls
- EFZ ProShares Short MSCI EAFE - gains when international markets decline
- HDGE AdvisorShares Ranger Equity Bear ETF - actively managed short positions
Advantages During Market Panic:
- No margin account required
- Trade like regular stocks
- No direct borrowing costs
- Simplified approach to shorting entire markets
Important Note: Short ETFs are not designed for long-term holding due to daily rebalancing and decay effects. They work best for short to medium-term bearish views, like the current tariff situation.
Other Short Selling Instruments
Futures Contracts
With major indices in freefall, index futures offer a way to capitalize on continued declines with significant leverage.
Contracts for Difference (CFDs)
Popular outside the U.S., these derivatives allow you to speculate on price movements without owning the underlying asset.
Leveraged Inverse ETFs
These 2x or 3x leveraged ETFs can amplify returns during rapid market declines, though they carry significantly higher risk and should only be used by experienced traders for very short timeframes.
Beyond basic short selling, several instruments can be deployed in the current market environment:
Put Options
Put options are particularly valuable during high-volatility periods like the current crash. They give you the right (but not the obligation) to sell an asset at a specified price within a specific time period, and their value increases when the underlying asset's price falls.
Key Benefits During Tariff Uncertainty:
Limited risk: Your maximum loss is the premium paid, protecting you from sudden policy reversals or market rebounds
Leverage: Options provide more exposure per dollar invested than direct short selling
No margin account: You can buy put options in a standard brokerage account
No borrowing costs: You don't need to borrow the underlying asset
Targeted exposure: You can precisely target companies most vulnerable to tariffs
Inverse or Short ETFs
With broad market indices plummeting, inverse ETFs offer straightforward exposure to continued declines. These exchange-traded funds are designed to move in the opposite direction of a market index or sector.
Timely Examples for the Tariff Crash:
SH (ProShares Short S&P 500) - rises when the S&P 500 falls
PSQ (ProShares Short QQQ) - rises when the NASDAQ falls
EFZ (ProShares Short MSCI EAFE) - gains when international developed markets decline
HDGE (AdvisorShares Ranger Equity Bear ETF) - actively managed short positions targeting vulnerable companies
Advantages During Market Panic:
No margin account required
Trade like regular stocks
No direct borrowing costs
Simplified approach to shorting an entire market or sector
Important Note: Short ETFs are generally not designed for long-term holding due to daily rebalancing and decay effects. They work best for short to medium-term bearish views, like the current tariff situation.
Other Short Selling Instruments
Futures Contracts: With major indices in freefall, index futures offer a way to capitalize on continued declines.
Contracts for Difference (CFDs): Popular outside the U.S., these derivatives allow you to speculate on price movements without owning the underlying asset.
Leveraged Inverse ETFs: With markets in rapid decline, these 2x or 3x leveraged ETFs can amplify returns, though they carry significantly higher risk and should only be used by experienced traders for very short timeframes.
Risk Management During the Tariff Crisis 2025
While short selling presents opportunities in the current market turmoil, heightened volatility requires disciplined risk management:
Tariff News Triggers Rapid Reversals
The market is exceptionally sensitive to tariff-related news. A single tweet suggesting negotiations or policy shifts could trigger violent upside moves and potential short squeezes. To manage this:
Use Stop Losses: Set clear exit points to protect against sudden market reversals
Size Positions Conservatively: The extreme volatility warrants smaller position sizes than normal
Monitor News Closely: Keep track of developments from both the U.S. and trading partners
Be Prepared for Circuit Breakers: Market-wide trading halts could affect your ability to exit positions
Beware of Coordinated Interventions
As the sell-off intensifies, the risk of coordinated central bank intervention increases. The Federal Reserve's current wait-and-see approach could shift quickly if markets deteriorate further. Such interventions could rapidly reverse downtrends, punishing short sellers.
Short Selling FAQ
Frequently Asked Questions
Is short selling legal?
Yes, short selling is legal in most major financial markets. However, it's subject to specific regulations that vary by country. For example, in the U.S., the SEC has implemented rules like the alternative uptick rule to restrict short selling during sharp market declines. Some markets may temporarily ban short selling during extreme market conditions.
What is the maximum amount I can lose when short selling?
Unlike going long where your maximum loss is limited to your initial investment, short selling has theoretically unlimited loss potential. This is because there's no upper limit to how high a stock's price can go. If you short a stock at $10 and it rises to $100, your loss would be $90 per share. This is why risk management is critical when short selling.
What is a short squeeze and how can I avoid it?
A short squeeze occurs when a heavily shorted stock rises sharply in price, forcing short sellers to buy shares to cover their positions, which drives the price even higher. To avoid being caught in a short squeeze: (1) Be cautious with heavily shorted stocks, (2) Use strict stop-loss orders, (3) Avoid shorting stocks with small float or high short interest, and (4) Consider using put options instead of direct short selling to limit your risk.
Can I short sell in a retirement account like an IRA?
Direct short selling is generally not allowed in retirement accounts like IRAs because these accounts cannot use margin. However, you can use alternatives that provide similar exposure to falling prices, such as buying put options or inverse ETFs, which are typically allowed in retirement accounts. Check with your specific account provider for their rules.
How do I find good short selling candidates?
To identify potential short selling opportunities, look for: (1) Companies with deteriorating fundamentals (declining earnings, revenue, or margins), (2) Stocks with bearish technical patterns (breaking below key support levels), (3) Companies with excessive valuations compared to peers, (4) Businesses with unsustainable business models or accounting red flags, and (5) Sectors experiencing cyclical downturns. Always conduct thorough research and consider consulting financial professionals before implementing short positions.
What's the difference between shorting and buying put options?
Direct shorting involves borrowing and selling shares with unlimited risk and limited profit potential (stock can only go to zero). Put options give you the right to sell at a specific price with limited risk (only the premium paid) and similar profit potential. Put options don't require borrowing shares, can be used in retirement accounts, have no hard-to-borrow fees, and expire (requiring precise timing). Direct shorting has no expiration but incurs borrowing costs and requires a margin account.
How can I use short selling to navigate the current tariff-driven market crash?
To navigate the 2025 tariff crash, consider: (1) Focus on sectors most vulnerable to tariffs, like import-dependent retailers, global manufacturers, and companies caught in EU-US trade disputes, (2) Use inverse ETFs (like SH or PSQ) for broad market exposure without margin requirements, (3) Consider put options for defined risk in case of sudden policy reversals, (4) Maintain smaller position sizes than usual due to extreme volatility, and (5) Stay informed about policy developments as sudden tariff negotiations could trigger rapid market reversals. Remember that protection of capital should be your priority in highly volatile environments.
What risks should I be especially aware of when short selling during the tariff crisis?
During the 2025 tariff crisis, short sellers face heightened risks: (1) Extreme volatility increases the likelihood of devastating short squeezes and rapid reversals, (2) Policy announcements or negotiations can instantly change market direction, (3) Potential coordinated central bank interventions could stabilize markets and hurt short positions, (4) Brokerages may increase margin requirements or restrict certain short activities during extreme volatility, and (5) Emotional trading decisions are more common during market crashes. These factors make risk management even more critical than in normal market conditions.
Short Selling Quiz: Test Your Shorting Knowledge
Test Your Knowledge: Short Selling Quiz
Conclusion: Is Short Selling Right for You in the Current Crisis?
The 2025 tariff crash presents significant opportunities for short sellers, but with extraordinary risks. This strategy allows you to potentially:
Profit during this market downturn
Hedge existing long-term holdings against further declines
Express a view on specific sectors most vulnerable to tariffs
However, today's market requires extreme caution due to:
Heightened volatility increasing the risk of devastating short squeezes
Potential policy reversals that could trigger rapid rebounds
Possible coordinated international responses to stabilize markets
Margin call risks as brokerages respond to extreme market conditions
For beginners navigating this tariff crisis, limited-risk alternatives like put options or small positions in inverse ETFs are significantly safer than direct short selling. Remember that the most skilled traders often reduce position sizes during periods of extreme uncertainty like we're experiencing now.
As the situation remains fluid and negotiations continue, maintain flexibility in your approach. What works in today's tariff environment might need adjustment as policies evolve and markets adapt.
Ready to learn more about trading through this tariff crisis? Check out our other guides on risk management, hedging strategies, and market analysis to build a comprehensive toolkit for navigating these unprecedented market conditions.
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