Short Selling

Short selling is a way to profit when a stock price falls. A trader borrows shares and sells them, hoping to buy them back later at a lower price and return them, pocketing the difference. It is the opposite of normal investing, where you buy first and sell later.

Short selling is used to bet against overvalued companies or to hedge other positions, but it carries unusually large risk. While a normal stock can only fall to zero, a shorted stock can rise without limit, so losses are theoretically unlimited. It also involves borrowing costs and the risk of a short squeeze, making it best suited to experienced investors.

A trader borrows and sells 100 shares at 50 dollars, collecting 5,000 dollars. If the price falls to 30 dollars, they buy the shares back for 3,000 dollars, return them, and keep 2,000 dollars. But if the price rises to 80 dollars, they lose 3,000 dollars.