What Is Short Selling? Risks, Benefits, and How It Works in Turkey

What is short selling? How does it work? Discover the risks, benefits, and Turkish regulations surrounding short selling in this in-depth guide.

Published by Zeynep ÖZTÜRK

28 July 2025, 10:41 published Updated 28 July 2025, 10:41

What Is Short Selling? Risks, Benefits, and How It Works in Turkey

In financial markets, investors can profit not only from rising prices but also from falling ones. One of the most well-known strategies to profit from declining prices is short selling. However, it’s a complex and high-risk strategy that requires a solid understanding of the markets. In this article, we’ll explore what short selling is, how it works, its pros and cons, and the regulatory environment in Turkey.

What Is Short Selling?

Short selling is a trading strategy where an investor borrows a security—usually a stock—and sells it on the market, expecting the price to decline. Once the price drops, the investor buys the security back at a lower price and returns it to the lender, pocketing the difference as profit.

Example:

An investor shorts a stock at 100 TRY.
The price drops to 80 TRY.
The investor buys it back at 80 TRY, making a 20 TRY profit.

How Does Short Selling Work?

Short selling is executed through a brokerage firm that lends the stock to the investor. The steps typically involve:

Broker Authorization: You must have an approved margin account with your broker to engage in short selling.
Posting Margin Collateral: Regulatory authorities require a certain amount of collateral to be posted.
Executing the Sell Order: The borrowed stock is sold on the open market.
Closing the Position: The investor later buys back the stock (ideally at a lower price) and returns it to the broker.

Advantages of Short Selling

Profit from Declines: Investors can make money even in bear markets.
Market Liquidity: Short selling increases trading volume and improves liquidity.
Correcting Overvalued Assets: Helps bring overhyped or overpriced stocks down to realistic levels.

Risks of Short Selling

While potentially lucrative, short selling carries significant risks, including unlimited potential losses if the stock price rises.

Main Risks:

Unlimited Loss Potential: Unlike buying a stock (where losses are capped), a rising stock price can cause limitless losses.
Margin Calls: If the collateral value drops, brokers may demand more funds or liquidate your position.
Market Volatility: Sudden news or regulatory changes can reverse the price trend rapidly.

Is Short Selling Legal in Turkey?

Yes, but it is tightly regulated by the Capital Markets Board of Turkey (SPK). Short selling in Turkey can only be done under specific conditions and with approved stocks. Moreover, SPK may impose temporary bans on short selling during periods of market volatility or suspected manipulation.

SPK Regulations:

Short selling is only allowed for specific stocks announced by SPK.
The list of eligible stocks is updated daily.
Violating a short selling ban can result in fines and other penalties.

Short Selling vs. Short Positions

Although the terms are often used interchangeably, there are technical differences between short selling and short positions.

Short Selling	Short Position
Involves selling borrowed stocks	Often executed via derivatives
Requires borrowing actual shares	No need to borrow; contracts are used
Heavily regulated by authorities	Can be executed on futures markets like VIOP

Popular Short Selling Strategies

Technical-Based Selling: Using indicators like RSI or MACD to identify overbought conditions.
Fundamental Analysis: Shorting companies with deteriorating financials or poor earnings.
News-Based Selling: Trading on anticipated negative news or analyst downgrades.

Famous Short Sellers and Cases

George Soros: Famously shorted the British pound in 1992, making over $1 billion.
Michael Burry: Predicted the 2008 housing collapse and shorted mortgage-backed securities.

Markets Where Short Selling Is Allowed

Borsa Istanbul (BIST): Selected stocks can be shorted under SPK regulations.
Forex Markets: Traders can go short via leveraged currency pairs.
VIOP (Turkish Futures Market): Allows short exposure via derivatives.
Global Exchanges: Short selling is widely practiced on the NYSE, NASDAQ, and other major platforms.

When Does Turkey Impose Short Selling Bans?

The Capital Markets Board may issue temporary short selling bans during periods of heightened volatility or suspected manipulation.

Example:
In early 2020, during the onset of the COVID-19 pandemic, Turkey temporarily banned short selling on numerous BIST-listed stocks to prevent panic-driven selloffs.

Is Short Selling Friend or Foe?

Short selling is a powerful tool for sophisticated investors looking to profit from market downturns. However, due to its inherent risks and the potential for unlimited losses, it is not suitable for everyone. In Turkey, it remains a legal but tightly monitored practice. If used responsibly and within regulatory guidelines, short selling can be a valuable part of an advanced investment strategy.