How Do You Make Money When a Stock Goes Down?

TL;DR: When a stock falls, two structures let a trader profit from the move without buying put options: short selling, which borrows shares and sells them with the intent to buy back at a lower price, and perpetual futures, which open a short position directly without borrowing shares and without an expiration date. Both pay when the underlying stock price falls and lose when it rises. Because a stock's potential rise is uncapped, position sizing and stop discipline matter more on red-day trades than on long-only ones.

Why most retail trading apps default to long-only

Standard retail trading apps default to long-only equity positions because buying a share is the simplest possible trade — pay cash, receive ownership, sell later. Shorting a stock is structurally different. The trader does not own the share; they borrow it from another holder, sell it on the open market, and owe shares back at some point in the future.

That mechanic requires the broker to maintain a share inventory to lend, track collateral as the price moves, and manage forced buy-ins when shares get recalled. None of that fits the simple long-only design most consumer trading apps were built around. As a result, the typical retail trading app offers easy access to going long on a stock and far less straightforward access to expressing a downside view on the same name.

Short selling explained in plain English

Short selling is a four-step trade. A trader believes Stock A, currently at $100, will drop. The trader borrows one share of Stock A from the broker's lending pool. The trader sells that borrowed share into the market at $100, receiving $100 in cash. Later, when the stock has fallen to $80, the trader buys one share back at $80 and returns it to the lender. The trader keeps the $20 difference as profit.

If the trade goes the other way — Stock A rises to $120 — the trader is now obligated to buy a share at $120 to return it, having sold at $100. The trade loses $20. Because the share price has no theoretical ceiling, the upside risk on a short position is unbounded in the same way the downside risk on a long position is bounded by zero. Brokers manage this by holding collateral against the position and forcing the trade closed if the margin runs out.

In practice, short selling on a brokerage account requires a margin account, available share inventory at the broker, and willingness to pay borrow fees that vary by how difficult the shares are to locate. Not every stock is shortable at every broker on every day, and harder-to-borrow names carry meaningfully higher daily costs.

Perps and a direct way to profit from a downside move

Perpetual futures — perps — are a derivative contract that tracks the price of an underlying stock without requiring the trader to borrow or own actual shares. A perp position has no expiration date, which distinguishes it from traditional futures contracts that expire on a fixed calendar date.

To express a downside view on a stock using a perp, a trader opens a short position on the contract. The trade is collateralized with margin posted to the exchange. The position's P&L mirrors the underlying stock price roughly one-to-one on the notional exposure: if Stock A drops 10%, the short perp position is up roughly 10% on the notional. There is no share borrow, no expiration, and no need to close the position by a specific date.

The structural difference matters for a retail trader who wants to bet on a downward move. A short perp position skips the share-borrow infrastructure that gates traditional short selling. It also avoids the expiration mechanic of traditional futures — the trade can stay open until the trader chooses to close it or until the exchange's liquidation engine forces it closed because of margin shortfall. Holding cost on a perp is paid through the funding rate, a small periodic payment between longs and shorts that keeps the contract price aligned with the underlying stock price.

Risk on the downside trade — what can blow it up

Short selling and short perp positions share the same fundamental risk: the underlying stock can rise more than the position can absorb. A 50% rise in the share price means the short position loses 50% of its notional exposure. On a leveraged short perp position, that loss is multiplied by the leverage used.

A few specific failure modes matter on the downside trade. A short squeeze — a sudden upward move driven by short-holders covering their positions at the same time — can produce a price spike that closes a short position at a much higher loss than the trader anticipated. The 2021 single-name short-squeeze episodes are the textbook example of how violently this can happen. News-driven gaps, where a stock opens far above the prior close because of an after-hours announcement, can blow through stop-loss levels before they fire. And on leveraged short positions, the liquidation distance — the upward move the position can absorb before forced closure — is shorter than most traders intuitively estimate.

Risk warning: A short position's loss is theoretically unbounded because a stock's price has no ceiling. Combined with leverage, an adverse move can close a position at a loss larger than the margin posted, and on an exchange with automated liquidation, the close can happen faster than the trader can manually react. Stop discipline and conservative sizing are the only defense — short trades without either can produce account-ending losses.

The defensive response is sizing and stops. A position sized to survive a 50% adverse move is a position the trader is choosing to lose half of in the worst case. A position with a pre-defined stop closes at a known loss rather than running to liquidation. Without either, a short trade can produce losses larger than the cash deposited — one of the recurring patterns in why most active traders blow up their accounts.

Sample setup: a single-name stock selling off pre-market

A common red-day setup: a single-name stock reports earnings after the prior day's close, the report disappoints, and the stock prints down 8% in pre-market trading. By the time the regular session opens, the move has happened and the stock is at a new lower level.

A trader who saw the announcement and wanted to express a short thesis has two structural choices. The first is to wait for regular-hours trading and short the shares once the market opens, accepting that the 8% gap has already occurred. The second is to open a short perp position pre-market, when most perp markets are still trading. The trade-off is that pre-market liquidity is thinner and bid-ask spreads are wider; the entry price will reflect that.

In either case, the trader is sizing the position against a stop-loss level that defines the worst acceptable adverse move. The thesis — that Stock A will continue lower as the regular session opens — is the input. The position size and stop define the trade's risk. The leverage multiple, if any, defines how dollar-meaningful the trade will be at the position size chosen. The framework is the same regardless of which short structure is used, and is the mirror image of the framework a long-only trader uses when betting on a stock going up.

Other ways to profit when a stock drops

Beyond short selling and short perps, two other instruments let a trader profit from a falling stock or basket.

Put options give the buyer the right, but not the obligation, to sell the underlying stock at a specified strike price by a specified expiration. The buyer pays a premium up front. If the stock falls below the strike, the put gains value; if the stock stays above the strike at expiration, the put expires worthless and the buyer's loss is capped at the premium paid. Puts have a defined-risk profile — the maximum loss is known on entry — but they come with time decay, where the option loses value as expiration approaches even when the stock does not move.

Inverse ETFs are exchange-traded funds engineered to deliver the inverse daily return of a target index or sector. A 1x inverse ETF on a broad index returns roughly the opposite of the index's daily move. Because the rebalancing happens daily, holding-period returns over multiple days can diverge from the inverse of the index's cumulative move — a known structural drag that makes inverse ETFs more suitable for short-duration directional bets than for long holds.

Each instrument has different cost, complexity, and risk characteristics. Puts cap loss but bleed time value. Inverse ETFs are simple to buy but drift over multi-day holds. Short selling carries borrow fees and unbounded upside risk. Short perps remove the borrow but introduce funding payments and liquidation distance.

How a downside trade decides on structure — checklist

1. Is the broker offering shortable share inventory in this stock? If not, share-borrow shorting is not available regardless of margin levels.
2. Is a perp available for the relevant single-name stock? Single-name stock perp coverage varies by platform.
3. What is the planned holding period? Share borrows accrue daily fees; perp positions accrue funding payments. Both add up on longer holds.
4. Has a stop-loss level been pre-defined? A short position without a stop is uncapped on the upside.
5. What leverage, if any? A leveraged short magnifies both directions. The shorter the distance to liquidation, the more sensitive the trade is to volatility.
6. What position size relative to the account? Single-name short positions are sensitive to single-name event risk — earnings, M&A, regulatory news.
7. Is the trade exit pre-defined? Knowing the target close price is as important as the entry.

Key terms

[Short selling](https://www.investopedia.com/terms/s/shortselling.asp). Borrowing shares to sell at the current price, with the obligation to buy them back later. Profits if the share price falls.

[Perpetual futures (perps)](https://www.investopedia.com/terms/p/perpetualfuture.asp). A derivative contract that tracks an underlying stock price and has no expiration date.

Short position. Any position that profits when the underlying stock price falls.

[Margin account](https://www.investopedia.com/terms/m/margin.asp). A brokerage account that allows borrowing against collateral, required for traditional share-borrow short selling.

[Borrow fee](https://www.investopedia.com/terms/h/hardtoborrow.asp). The daily cost of borrowing shares for a short sale, expressed as an annualized rate. Higher for harder-to-borrow names.

[Short squeeze](https://www.investopedia.com/terms/s/shortsqueeze.asp). A sudden upward price move driven by short-position holders covering their positions simultaneously.

[Liquidation](https://www.investopedia.com/terms/l/liquidation.asp). Forced closure of a leveraged position when unrealized losses approach the posted margin minus a maintenance buffer.

[Funding rate](https://www.investopedia.com/terms/f/fundingrate.asp). A small periodic payment on a perp position that keeps the contract price aligned with the underlying stock price.

[Put option](https://www.investopedia.com/terms/p/putoption.asp). A contract giving the buyer the right to sell the underlying stock at a strike price by expiration. Loss is capped at the premium paid.

[Inverse ETF](https://www.investopedia.com/terms/i/inverse-etf.asp). An exchange-traded fund engineered to deliver the inverse daily return of a target index or sector.

[Notional exposure](https://www.investopedia.com/terms/n/notional-value.asp). The full market value of the position the contract controls — distinct from the margin posted to open it.

FAQ

How do you make money when a stock goes down without buying puts?

The two primary structures are short selling and perpetual futures. Short selling borrows shares, sells them at the current price, and buys them back at a lower price for profit. A short perp position opens a derivative contract that tracks the underlying stock price and pays when the stock falls, without requiring a share borrow or an expiration date. Both deliver the percentage drop in the underlying stock price, with leverage amplifying both directions if used.

Can a regular retail trader short a stock?

It depends on the brokerage and the stock. Share-borrow short selling requires a margin account, available share inventory at the broker, and willingness to pay daily borrow fees. Coverage of harder-to-borrow names is uneven across retail platforms. Perpetual futures on single-name stocks are a separate structure that opens a short position directly on a derivatives platform, where supported.

Is shorting riskier than going long?

The risk distribution is asymmetric. A long position on a stock can fall to zero — a 100% loss in the worst case. A short position loses as the stock rises, and a stock's price has no theoretical ceiling. A 200% rise produces a 200% loss on the unleveraged short. Stop-loss discipline and conservative position sizing matter more on short positions because the upside loss is theoretically unbounded.

What is short selling exactly, in plain English?

A trader borrows shares from a broker, immediately sells them at the current market price, and receives cash. Later, the trader buys the same number of shares back at whatever the market price is then and returns them to the lender. If the buy-back price is lower than the original sale price, the difference is profit. If it is higher, the difference is a loss. The trader is paying for the round trip plus the daily borrow fee accrued in between.

How do perpetual futures let a trader bet on a stock falling?

A short perp position is a derivative contract that pays the percentage drop in the underlying stock price, without requiring the trader to borrow or own actual shares. The position is collateralized with margin. There is no expiration date, so the trade can stay open as long as the trader wants and the margin holds. Periodic funding payments keep the contract price aligned with the underlying stock price.

What happens during a short squeeze?

A short squeeze occurs when a sharp upward move forces short-holders to buy shares to cover their positions, and that buying drives the price even higher, forcing more shorts to cover. The feedback loop can produce extreme upward spikes over short windows. The 2021 single-name short-squeeze episodes are the most studied recent example. For a trader holding a short, a squeeze can mean the position closes at a far worse price than the pre-defined stop suggested.

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