Short selling is a trading strategy where you borrow shares and sell them at the current price, hoping to buy them back later at a lower price and pocket the difference. Your gross profit is calculated as: Gross Profit = (Short Price - Cover Price) x Shares. If the stock drops, you profit; if it rises, you lose money.

Unlike buying a stock, short selling involves borrowing costs. Your broker charges an annual borrow fee, prorated by the number of days you hold the position. The formula is: Borrow Cost = Short Price x Shares x (Borrow Rate / 100) x (Days Held / 365). Hard-to-borrow stocks can carry borrow fees of 20% or more, significantly eating into profits.

For example, if you short 100 shares at $150 and cover at $120 after 30 days with a 2.5% annual borrow fee and no commissions, your gross profit is $3,000. The borrow cost is $150 x 100 x 0.025 x (30/365) = $30.82, giving you a net profit of $2,969.18 and an ROI of 19.79%. Always factor in borrow costs and commissions to get an accurate picture of your short trade profitability.