What Is ‘Short Selling’?

“Short selling” can be intended as a bet that a stock or market index will go down in price in a specified period, or it can be used as a “hedge” by investors seeking insurance in case the market falls.

Short selling is the reverse of the more typical buy now, sell later approach--also known as “long” investing--that most people use. In a short sale, a trader borrows a security (or currency) from a brokerage and immediately sells it on the open market. Assuming the market price then declines, the trader can eventually repurchase the security at a lower price, return the security to the lender and pocket the difference between the original sale price and the repurchase price.

When a short bet works, it can be extremely lucrative. But if the bet is wrong--and the security’s price soars instead of falls--a short-seller can rack up unlimited losses until he finally decides to repurchase the surging security and close out the trade.