Short selling is betting that a stock will go DOWN. Here's the mechanics: you borrow shares from your broker (who lends them from another client's account), sell those borrowed shares at the current market price, and then wait. If the stock drops, you buy the shares back at the lower price, return them to your broker, and pocket the difference. If you short a stock at $100 and buy it back at $70, you made $30 per share minus borrowing fees. It's the reverse of the normal buy-low-sell-high process — you sell high first, then buy low later. Every trade has a buyer and a seller. Short sellers are often the sellers providing liquidity when stocks are overheated.

Short selling plays an important role in healthy markets. Short sellers are the market's investigators — they dig into company financials, find fraud, expose overvaluation, and keep prices honest. Some of the biggest corporate frauds in history (Enron, Wirecard, Luckin Coffee) were first identified by short sellers who published research showing the numbers didn't add up. Without short sellers, stocks could stay overvalued for much longer, creating bigger crashes when reality finally hits. The SEC allows short selling with certain rules: you must locate shares to borrow before shorting (the 'locate' requirement), and the 'uptick rule' restricts shorting on a downtick to prevent aggressive piling on.

Here's where short selling gets dangerous: your risk is theoretically UNLIMITED. When you buy a stock long, the most you can lose is your entire investment (the stock goes to $0). But when you short, the stock can go to infinity — there's no ceiling. If you short a stock at $50 and it runs to $500, you're losing $450 per share, which is nine times your original bet. This is called a 'short squeeze' when it happens violently. Short sellers are forced to buy shares to cover their losses, which pushes the price even higher, which forces more short sellers to cover — a vicious cycle. GameStop in January 2021 was the most famous short squeeze in modern history, running from $20 to nearly $500 in weeks as retail traders squeezed heavily-shorted hedge funds.

If you're considering short selling, know the rules. You need a margin account (not a basic cash account). Your broker charges a borrow fee — popular shorts can have annualized fees of 20% or more. You can be forced to close your position if the lender recalls their shares (a 'buy-in'). And the tax treatment is less favorable: all short-selling profits are taxed as short-term capital gains regardless of how long you held the position. Most importantly, position sizing is critical. Never short a stock with more than you're prepared to lose, and always use a stop loss. Professional short sellers typically size positions smaller than their long positions precisely because the risk profile is asymmetric. Shorting is a tool, not a strategy for beginners.