Short Selling
Borrowing shares and selling them, hoping to buy them back cheaper later. Profit = sell price minus buy-back price.
Short selling is the practice of borrowing shares from a broker, selling them in the open market, and later buying them back (covering) to return to the lender. The profit comes from price decline; the loss comes from price increases — and losses are theoretically unlimited because a stock can rise infinitely.
To short a stock, your broker must be able to locate shares to borrow. You pay a borrow rate (which can be very high for heavily shorted or hard-to-borrow stocks). The SEC's Regulation SHO governs short selling rules, including the locate requirement.
Short selling provides market efficiency by allowing negative views to be expressed in prices. Shorts are also used to hedge long portfolios and by market makers to facilitate customer buying without taking directional risk.
On the desk
You borrow 100 shares at $50 and sell them for $5,000. The stock drops to $35. You buy back 100 shares for $3,500 and return them to the lender. Profit: $5,000 − $3,500 − borrow fees = roughly $1,450. If the stock rises to $80 instead, your loss is $3,000+.