What Is Short Selling?

Short selling is an investment strategy where you borrow shares of a stock from your broker, sell them immediately, and hope to buy them back later at a lower price. If the stock drops, you profit from the difference. If it rises, you lose money. Short sellers are betting that a stock's price will decline.

Here is how it works mechanically: You borrow 100 shares from your broker and sell them at $50 each, receiving $5,000. If the stock drops to $30, you buy back 100 shares for $3,000 and return them to the lender. Your profit is $2,000 (minus borrowing fees). If the stock rises to $70 instead, you have to buy back at $7,000, losing $2,000.

Short selling is inherently riskier than buying stocks long. When you buy a stock, the maximum you can lose is 100% (the stock goes to zero). When you short a stock, your potential losses are theoretically unlimited because the stock price can rise infinitely. This asymmetry is why short selling is considered an advanced strategy.