What is Short Selling?
Short selling is the practice of borrowing shares and selling them with the obligation to buy them back later, profiting if the price declines. The risk is unlimited since stock prices can rise indefinitely.
Short Selling Explained
Short selling lets traders profit from falling prices but carries unique and dangerous risks. Unlike buying (where maximum loss is your investment), short losses are theoretically unlimited. If a shorted stock rises dramatically, you may face a margin call requiring additional funds. Short squeezes — where rising prices force shorts to cover, pushing prices even higher — can be catastrophic.
Real-World Example
You believe a stock at $50 is overvalued. You borrow 100 shares and sell them for $5,000. The stock drops to $40, and you buy back the shares for $4,000, returning them to the lender. Your profit is $1,000 minus borrowing costs. But if the stock rises to $70, you lose $2,000 — and there's no ceiling on how high it can go.
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