Short Selling
Borrowing shares to sell at the current price, then repurchasing them later at a lower price to profit from the decline.
What is Short Selling?
Short selling is an investment strategy where an investor borrows shares from a broker and immediately sells them on the open market, with the obligation to return the shares later. The short seller profits if the stock price falls — they repurchase the shares at a lower price, return them to the lender, and pocket the difference. Short selling carries theoretically unlimited downside risk because a stock price can rise without bound. It requires a margin account, and sellers pay borrowing fees and any dividends issued during the holding period. Short sellers play an important role in price discovery and market efficiency.
Example
In early 2021, GameStop (GME) had become one of the most heavily shorted stocks on the market. A coordinated buying effort by retail investors on Reddit caused the stock price to surge from around $20 to over $480, creating massive losses for short sellers who were forced to buy shares at much higher prices to close their positions — a 'short squeeze.'
Source: SEC — Short Sales