Short Selling

Short selling means borrowing shares you do not own, selling them, then buying them back later to return. It profits when the price falls, running in the opposite direction to ordinary buying.

Sell borrowed stock at 100 and buy it back at 70 and you keep 30. But if it rises to 150 you lose 50, and at 300 you lose 200. Prices have no ceiling, so unlike a normal purchase the loss has no limit.

When a heavily shorted stock suddenly rises, short sellers rush to buy back at once and the price explodes upward. This is a short squeeze, and the GameStop episode in 2021 is the best-known example.

Short selling does useful work by correcting overheated prices and adding liquidity, but for individual investors it is hard to access and dangerous to run. A trade with unlimited downside is not a beginner's tool. If you want to bet on a decline, an inverse ETF at least caps the loss at what you put in — though it is no better suited to long holding periods.